List of Contents
- Govt releases new “Public Sector Enterprise Policy”
- Issues in Taxing PF contribution
- Privatisation of banking sector: Issues and analysis
- Issue of Digital Services Tax between India and US – Explained
- Strategic Disinvestment Policy: Issues and Challenges – Explained
- Budget proposes tax on EPF interest
- A normal budget for abnormal times
- Evaluation of Budget 2021
- Budget 2021: Continues with fiscal conservatism
- Budget 2021: Despite some hits, the Budget has crucial misses
- Retrospective Taxation: Cairns Issue
- What is disinvestment?
- What are off-budget borrowings?
- Issue of K-shaped recovery: How government budget can deal with it?
- Government ropes in I-T department to crack down on GST fraud
- Importance path How to increase economic recovery of India
- Lack of fiscal support could stoke inequality
- Issue of Retrospective tax cases; what should India do next?
- India lost Retrospective taxation case to Cairn
- Why Indian Economy is slowing down?
- What are the issues facing Indian Economy?
- How to calculate GDP using Expenditure method?
- What are the causes behind falling GDP growth?
- Modernise India’s archaic tax laws
- Government interventions
- Atmanirbhar Bharat 3.0
- The Weakened financial capacity of States
- GST Compensation Cess
- What is Cess?
- What is GST Compensation Cess?
- Centre gives in, says will borrow to make up for states’ GST shortfall
- Infrastructure and manufacturing led growth in India
- Governance of Public sector units: Privatization of SAIL
- GST Compensation Issue
- Retrospective taxation – Vodafone case
- GST Compensation disagreement between the Centre and the States
- India’s Tax Charter
- GST compensation Standoff
- GST – Grand Bargain 2.0
- Factors affecting present inflation level in India
- Why prices of Petrol and Diesel are rising?
- RBI’s expansionary policy and challenge of the impossible trinity
- India’s retail inflation
- RBI allows RRBs to access LAF, MSF windows
- Highlights of MPC meeting
- RBI monetary policy Explained: Why have rates been kept unchanged yet again?
- RBI sets up Reserve Bank Innovation Hub(RBIH)
- Effectiveness of Monetary Policy in India | Nov. 11th, 2020
- Reserve Bank of India (RBI) governance
- Base year of CPI-IW changed
- India’s inflation targeting policy (Monetary policy)
- Demand to Rework Inflation Targeting Regime
- Impacts and importance of GDP revised estimates
- Focus areas of Economic Survey 2020-21
- Reviving consumption demand for economic growth
- Issue of K-shaped recovery: How government budget can deal with it?
- World Bank’s Global Economic Prospects Report predicts contraction of Indian economy
- Economic Impact of Internet shutdown in Indian and world economy
- GDP likely to contract by 7.7% in 2020-21, says Govt.
- Current account surplus moderates to $15.5 bn in Q2
- Importance path How to increase economic recovery of India
- Vital notes from the year 2020
- Economic Growth
- Why Indian Economy is slowing down?
- What are the issues facing Indian Economy?
- How to calculate GDP using Expenditure method?
- What are the causes behind falling GDP growth?
- India drops two ranks in Human Development Index
- India’s retail inflation
- Income support to mitigate income losses
- Overestimate GDP growth data
- Dangers of misplaced optimism in economy
- Indian economy witnessing V-shaped recovery: Finance Ministry report
- Economic recovery
- GDP recovery- questionable data
- Present State of economy
- Export: A key to economic growth
- Base year of CPI-IW changed
- Bangladesh’s per capita income greater than India’s
- Indian economic recovery – Unlock phases
- COVID – 19 and India’s road to economic revival
- To Rebuild and Recover from COVID-19
- Issue of Digital Services Tax between India and US – Explained
- Delhi HC stays Future-Reliance deal
- Trade with China shrank in 2020, deficit at five-year low
- After rice, India’s wheat exports register highest ever export in six years: US Department of Agriculture.
- USTR slams India’s Equalisation levy
- UK-India Free Trade relations and Cairn Energy PLC issue
- Current account surplus moderates to $15.5 bn in Q2
- Importance of creating Resilient supply chains
- WTO rules on domestic support and food security
- WTO rulebook
- Why antitrust lawsuits are being filed repeatedly against tech giants like Facebook?
- Rise of corporate nationalism
- Diversity requirements to Indian companies
- Impact of the COVID-19 Pandemic on Trade and Development Report: UNCTAD
- Push for Exports
- Time for an Asian Century
- Trade openness and globalization
- FTA’s and its significance
- Lessons from Vietnam and Bangladesh
- Virtual Global Investor Roundtable (VGIR) for Foreign Investment in India
- How the US economy and its policy choices likely to affect India
- Cryptocurrencies in India
- Privatisation of banking sector: Issues and analysis
- Why RBI kept interest rates Unchanged?
- Bad Banks – pros and cons
- Govt. releases new guidelines for banks under “Foreign Contribution (Regulation) Act”
- Need for New 4-tier Regulations for NBFCs
- 4-tier structure for regulation of NBFCs
- Too Big To Fail: Domestic Systemically Important Banks (D-SIBs)
- Establishment of Bad Banks – associated Issues and Significance
- RBI constituted Jayant Kumar Dash committee to study Digital lending activities
- RBI unveils guidelines for Payment Infrastructure Development Fund
- Digital technology worsen financial exclusion in rural India
- Report on Trend and Progress of Banking in India 2019-20
- RBI launches Digital payments index to track transactions
- What is Positive Pay Mechanism?
- RBI allows RRBs to access LAF, MSF windows
- India Post Payments Bank launches its digital payments services ‘DakPay’
- Farm and Banking Reform
- India and UN-Based Better Than Cash Alliance organizes learning on fintech solutions
- Why Corporate houses should not own banks?
- Permitting industrial houses to own banks
- Corporates as Bankers: Bane or boon for economy?
- corporate houses in Indian banking
- Banking reforms
- Lakshmi Vilas Bank (LVB) merger with DBS bank
- lakshmi vilas bank crisis
- Issue of Lakshmi Vilas Bank | 19th November
- Moratorium on Lakshmi Vilas Bank
- Priority Sector Lending (PSL) guidelines
- National Payments Corporation of India (NPCI)
- Digital payment system in India
- What is the role of RBI in the evolution of digital payment in India?
- Conclusive land titling system in India and its challenges – Explained pointwise
- New land allotment policy of Jammu and Kashmir (J&K)
- The state of farmers
- Consolidation of land holdings
- Indian Agriculture Reforms
- Government announced “Single Security Market Code”
- India’s Sovereign Ratings don’t reflect its fundamentals
- Decriminalisation of offences under LLP Act
- Green bonds
- SEBI moots entry norms to set up stock exchanges
- What are Municipal Bonds?
- Zero-coupon bonds: Innovative govt tool to fund PSBs, keep the deficit in check
- Zero-coupon bonds:
- India and UN-Based Better Than Cash Alliance organizes learning on fintech solutions
- Exclusive arbitration body for financial disputes
- Explained: What are Negative Bond Yields?
- RBI sets up Reserve Bank Innovation Hub(RBIH)
- Divestment in fossil fuels
- PM Modi’s Acknowledgement of role of private sector
- “PLI Scheme for pharmaceuticals and IT hardware” Approved
- Production Linked Incentive (PLI) scheme
- Causes of accidents in firework industry
- NITI Aayog study to track “Economic Impact of Green Verdicts”
- New Farm Laws and Labour Codes is the way forward
- What is “Make in India Initiative 2.0”?
- What is “One District One Product Scheme”?
- Government launches “Portal to collect data on gig workers”
- Indian cricket team’s success can be a model for country’s manufacturing sector
- 4th edition of “Future Investment Initiative” Forum
- Decriminalisation of offences under LLP Act
- SC ruling on Section 32A of IBC
- National Startup Advisory Council
- Startup India Seed Fund
- Union Minister inaugurates the ‘Prarambh: Startup India International Summit’
- 1,600 new tech start-ups and 12 unicorns in 2020: Nasscom’s Indian Tech Start-up Ecosystem report
- Government approves new scheme for Industrial Development of Jammu & Kashmir
- Government launched virtual toy hackathon ‘Toycathon 2021’
- National Startup Awards 2021
- The Wistron Dispute and China’s lessons.
- Prime Minister Formalisation of Micro food processing Enterprises (PM-FME) Scheme
- Why violence happened at Wistron-Apple Facility?
- Wistron Violence and issue of contract workers
- 100% FDI in DTH service
- Why antitrust lawsuits are being filed repeatedly against tech giants like Facebook?
- Rise of corporate nationalism
- Diversity requirements to Indian companies
- India’s 1st LGBT+ workplace equality index launched
- What is Quality Council of India?
- Issues in Labour codes
- Initiative to boost domestic manufacturing in India | 26th Nov. 2020
- Labour law reforms and Trade unions
- Production-Linked Incentive(PLI) Scheme
- Reservation for locals in private jobs | 9th Nov. 2020
- Platform workers and their issues
- Industrial Revolution 4.0: challenges and way forward | 29th October, 2020
- What is Industrial Revolution 4.0?
- Industrial Revolution 4.0
- MSME Udyam Process
- Labour codes reforms
- Production Linked Incentive Scheme
- Insolvency and Bankruptcy Code (IBC 2016)
- Parliament and the new labour codes
- Aatmanirbhar bharat in toy making
- Future of Work – Industry 4.0
- Labour Ministry launches Software Applications for five All India Surveys
- Issues in the draft rules for the Code on Social Security 2020
- TIFAC launches SAKSHAM Portal and Seaweed Mission
- New Farm Laws and Labour Codes is the way forward
- Budget proposes tax on EPF interest
- Evaluation of Budget 2021
- Impacts of devaluing domestic work
- Trends in Housework valuation
- Wages for housework: An Analysis
- Formalising the work of community workers
- Paying women for domestic and care work
- Issues in wages Against Housework and Alternatives to it
- Should There Be Wages for Housework?
- The Wistron Dispute and China’s lessons.
- Why violence happened at Wistron-Apple Facility?
- Wistron Violence and issue of contract workers
- Issues in Labour codes
- Central Trade Unions strike
- Women workforce
- Labour law reforms and Trade unions
- Atmanirbhar Bharat Rozgar Yojana
- Challenges to Atma Nirbhar Bharat
- Need for Right to work in India
- Unemployment in india
- Reservation for locals in private jobs | 9th Nov. 2020
- Low labour force participation (LlFP) of Indian women
- Gig Economy and platform workers under labor laws in India | November 2nd, 2020
- What is the Gig Economy and platform work economy?
- Provisions for gig and platform workers in labour laws of India
- Need for providing benefits to the gig workers
- Issues in Labour laws coverage for gig workers
- What should be done?
- Platform workers and their issues
- India’s jobs conundrum
- Reducing the vulnerabilities of urban employment
- How to become Petroleum Independent?
- Saksham campaign and the importance of fuel conservation – Explained Pointwise
- What are findings of “India Energy Outlook 2021”?
- Clean energy is the key to COVID-19 recovery
- Petroleum & Natural Gas Ministry launches “SAKSHAM campaign”
- Why prices of Petrol and Diesel are rising?
- Tapovan Vishnugad Hydropower Project
- Green Energy Initiatives in Budget 2021- Explained
- Initiatives to promote “Ethanol as an alternate fuel”
- “Reform-based and result-linked scheme” to revive discoms
- A comparison of CBG (Compressed Bio Gas) and CNG
- Ensuring accountability in the new Electricity (Rights of Consumers) Rules, 2020
- Only discoms are allowed to install solar plants under Grid-connected Roof top Solar Scheme: Centre
- BEE Launches SAATHEE Portal to Track State Energy Efficiency Targets
- National Energy Conservation awards 2020
- Government launches Single Window Clearance Portal of Ministry of Coal
- Efforts to increase Electric mobility in India
- World’s largest floating solar energy project in Omkareshwar Dam
- Prime Minister inaugurates Kochi-Mangalore natural gas pipeline
- Increasing energy efficiency among consumers
- Electricity (Rights of Consumers) Rules, 2020
- North Eastern Region Power System Improvement Project
- Transport Ministry invites comments for introducing adoption of E20 fuel
- Coal sector reforms to reduce CO2 emissions
- USD 60 billion investment coming in gas infrastructure: Union Minister
- Qrious Project: Why petrol price is increasing in India? How and why should India achieve “End of oil-age”?
- A new roadmap for end of oil age
- Energy Efficiency Report 2020
- Draft Electricity Act (Amendment) Bill 2020
- Draft Electricity Act (Amendment) Bill 2020
- What is UDAY scheme?
- UDAY scheme
- Commercialization of coal mining
- Power sector in India
- Prime Minister launches “Mahabahu-Brahmaputra Programme” in Assam
- The issue of Road Safety in India – Explained pointwise
- What is the “Char Dham Project”?
- The rising concern of India’s ageing dams
- Establishing thought partnerships between the government and private entities
- Hisar Airport Inaugurated Under RCS-UDAN
- Central Vista judgment: Issue of public participation in public projects
- Post-Central vista verdict: Need to improve process of developing Public project?
- PM inaugurates Rewari – Madar section on Western corridor
- Government launches Indian Railways Freight Business Development Portal
- Supreme Court Judgment on Central Vista Redevelopment Project
- Government kicking off Seaplane Services on selected Routes
- Cabinet approves 3 infra projects
- Why Dedicated Freight Corridor matters — for Railways, the country?
- World Bank Signs $500 Million Project to Develop Green, Resilient and Safe Highways in India
- Steps needed to make spectrum Auction successful
- Indian Railways issues draft National Rail Plan
- India and Bangladesh PM jointly inaugurates Chilahati-Haldibari rail link
- PM-WANI: Revolutionise the way India accesses the internet
- Union Minister inaugurates Koilwar Bridge
- Draft Indian Ports Bill,2020
- Central Vista Project: What are the benefits and issues associated to it?
- Andhra Pradesh’s three capital plan
- Infra Investment
- Air India Strategic Sale
- Redesign policy for private investment
- “PLI Scheme for pharmaceuticals and IT hardware” Approved
- Transport Minister launches ‘Go Electric Campaign’
- Production Linked Incentive (PLI) scheme
- “Samarth Scheme” for Capacity Building in Textile Sector
- Mega Investment Textiles Parks (MITRA) scheme for textile sector
- “Vehicle Scrappage Policy” to phase out old and unfit vehicles
- Vehicle Scrappage Policy and the associated challenges: Explained
- RERA 2016 protects the interest of Homebuyers
- ‘MICE’ tourism policy of Gujarat
- What are spectrum auctions?
- New norms for DTH television distribution sector
- 100% FDI in DTH service
- INDIAN PHARMACEUTICAL SECTOR CHALLENGES AND REFORMS
Fiscal Policy
Govt releases new “Public Sector Enterprise Policy”
What is the news?
The Government of India has released a new ‘Public Sector Enterprise Policy’.
About ‘Public Sector Enterprise Policy’:
The policy classifies public sector commercial enterprises into the strategic and non-strategic sector:
Strategic Sector: There would be a maximum of four public sector companies in strategic sectors. State-owned firms in other segments would be privatized eventually.
The following 4 sectors are covered under strategic sectors:
- Atomic energy, Space and Defence
- Transport and Telecommunications
- Power, Petroleum, Coal, and other minerals
- Banking, Insurance, and financial services
Non- Strategic Sector: CPSEs of this sector shall be privatized or closed, if privatization is not possible.
Exceptions: The policy would not be applied on:
- Public sector classes like major port trusts, the Airport Authority of India, and undertakings in security printing and minting.
- Public sector entities such as not-for-profit companies or CPSEs providing support to vulnerable groups.
Process of Privatisation:
- NITI Aayog will recommend PSUs for retention in strategic sectors and that should be considered for privatization, merger, or closure.
- The Core Group of Secretaries on Divestment(CGD) headed by the cabinet secretary will consider these recommendations.
- Final approval will be provided by the Alternative Mechanism. This mechanism consists of the Finance minister, Ministers for Administrative reforms, and the Minister for roads, transport, and highways.
- Further, the Department of Investment and Public Asset Management (DIPAM), can also approach the Cabinet for strategic disinvestment of a specific PSE from time-to-time. DIPAM manages government equity in public sector companies.
Source: The Hindu
Strategic Disinvestment Policy: Issues and Challenges – Explained
Issues in Taxing PF contribution
Synopsis: By taxing the income of PF contributions over 2.5 lakhs, the government wants to restrict High net-worth individuals (HNIs) who are using the social welfare scheme as a tax haven. Though it is well-intended, it has many ambiguities.
Read More – Budget proposes tax on EPF interest|ForumIAS Blog
Background
- The Union Budget 2021 has proposed taxing the income on provident fund contributions of over Rs. 2.5 lakh a year from 01 April 2021.
- The rationale given for taxing the income from provident fund contributions is to target HNIs. They are using the PF savings to avoid taxation. For example, the 100 largest employees’ PF (EPF) accounts had a combined balance of over ₹2,000 crores.
- This is not the first time the government had tried to tax PF savings. In the 2016-17 Budget, the government proposed to tax 60% of EPF balances at the time of withdrawal. But due to protest from employees, it was withdrawn later.
What are the ambiguities in this scheme?
Revenue Department has pointed out that the tax will only affect a small group of HNIs. However, the scheme suffers from the following ambiguities,
- First, the threshold of taxing contributions of over Rs. 2.5 lakh is very low. It will end up taxing PF income for employees who are investing ₹21,000 a month towards their retirement.
- Second, the threshold proposed is also not in line with the ₹7.5 lakh limit. It was set in last year’s Budget for employers’ contributions into the EPF, National Pension System (NPS) or other superannuation funds.
- Third, it creates inequity between India’s limited retirement savings instruments. For example, it does not cover NPS investments over ₹2.5 lakh a year, but it includes government employees’ contributions into the GPF.
- Fourth, it is also not clear on when and how the tax is to be paid. Either at retirement or each year after the PF rate is announced.
- Fifth, The CBDT chief has said that employees should showcase PF income in their annual tax returns. But this may work for GPF members whose interest rate is announced every quarter. Not for EPF accounts, as interest rates are declared late and credited even later.
- Finally, this move will affect the fund flow into EPF. This will in turn hamper the government’s sources for finance which is largely dependent on market borrowings.
Privatisation of banking sector: Issues and analysis
Source: The Indian Express
Syllabus: GS -3 Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment.
Synopsis: The government has decided to privatise two public sector banks. The move will give the private sector a key role in the banking sector.
Introduction
The government has announced the disinvestment policies for four strategic sectors including banking, insurance, and financial services. The government will have a bare minimum presence in these sectors.
- Earlier, the government merged ten PSU banks into four.
- The government is now left with 12 state-owned banks, from 28 earlier.
- The government will select 2 banks for privatization, based on the NITI Aayog’s recommendations. These recommendations will be considered by a core group of secretaries on disinvestment.
What were the reasons for the nationalization of Private banks?
In the Mid-1960s, the commercial banking sector was most profitable, especially after the consolidation of 566 banks in 1951 to 91 in 1967. However, some issues were present in this sectors at that time:
- Branches were mostly opened in the urban areas. Rural and semi-urban areas were not served by commercial banking.
- Banks were not willing to take any social responsibilities. They were more concerned with the profits and afraid to diversify their loan portfolios.
- Nationalisation was done with an intention to align the banking sector with a socialistic approach of the government.
Thus, from 1969, the process of nationalization of the 14 largest private banks started.
Why government is privatizing the PSBs?
However, at present, PSBs are suffering from many issues:
- First, Public Sector Banks continue to have high Non-Performing Assets and stressed assets as compared to private banks.
- Second, banks are expected to report higher NPAs and loan losses after the Covid-related regulatory relaxations are lifted. As a result, the government would need to inject funds into weak public sector banks.
- Third, Governance reforms have not been able to improve the financial position of public sector banks.
The profitability, market capitalization, and dividend payment record of PSBs are not improving, despite efforts of reform by the government.
How are the private banks performing currently?
- Private banks’ market share in loans has risen to 36% in 2020, while public sector banks’ share has fallen to 59.8% in 2020 (from 74.28% in 2015).
- They are expanding their market share through new products, technology, and better services. They have attracted better valuations in stock markets.
- For example, HDFC Bank has a market capitalization of Rs 8.80 lakh crore while SBI commands just Rs 3.50 lakh crore.
- However, everything is not well within private sector banking as well. CEOs of ICICI and Yes bank are facing the investigation for doubtful loans and other illegal activities. Lakshmi Vilas Bank merged with DBS Bank of Singapore after operational issues.
- Moreover, an Asset quality review of banks in 2015, found that many private sector banks were under-reporting NPAs.
Thus, the privatization drive this time should be thoughtful. Lessons should be learnt from the past. An adequate mechanism to ensure accountability must be established in the commercial banking sector.
Issue of Digital Services Tax between India and US – Explained
Table of contents
Recently the U.S. determined India’s Digital Services Tax (DST) as discriminatory. It concluded that the DST is causing an adverse impact on American commerce and hence, an action needs to be taken under trade act. Meanwhile, The USTR also said, “DST by its structure and operation discriminates against U.S. digital companies”. But the USTR in its special 301 report missed few important aspects and also completely neglected the global need to tax digital services.
What is Digital Services Tax (DST)?
In 2016 India introduced a 6% equalisation levy. But the levy was restricted to online advertisement services (commonly known as “digital advertising taxes” or DATs). In simple terms, the levy applied on the payments made to a non-resident by the Indians for advertising on their platform.
The government in 2020 introduced an amendment to the equalisation levy in the Finance Bill 2020-21. The important amendments include,
- A 2% Digital Service Tax (DST) was imposed on non-resident, digital service providers. With this amendment, the foreign digital service providers have to pay their fair share of tax on revenues generated in the Indian digital market.
- The amendment widens the tax to include a range of digital services. These services include digital platform services, software as a service, data-related services, and several other categories including e-commerce operations.
- Companies with a turnover of more than Rs. 2 crores, will pay this tax.
Why India introduced the Digital Service Tax?
First, the nature of digital service companies. These companies don’t have any physical presence in the markets. Instead, they use intangibles to provide services. For example, one can pay for the Amazon Prime membership in India. But the services of prime membership like watching movies, listening to songs are intangible.
Determining the value of these intangibles is tough. So the government introduced the Digital Service Tax of 2% on non-resident service provider’s revenue in India.
Second, the failure of international consensus. In 2013, the OECD (Organisation for Economic Co-operation and Development) launched the Base Erosion and Profit Shifting (BEPS) programme. It was launched primarily to find a way to tax digital companies. But no consensus has been achieved yet. So, in 2016 India became the first country to implement the equalisation levy as a temporary way of taxation. This is then followed by countries like France, UK, etc.
Third, India’s right to tax digital service providers. If a company has users in India and also has an economic connection with India then, India has the right to tax its economic operation. India being a developing country provides large markets for digital corporations. So taxing them is a matter of right.
Fourth, These DST create a level playing field between online and regular (brick and mortar businesses). In 2016, the Akhilesh Ranjan Committee Report had also suggested to tax the digital companies as they enjoy a sustainable economic presence.
What are the accusations mentioned by the US? What India said in reply?
The first accusation, DST is inconsistent with the principles of international taxation. International taxation laws apply to the revenue of companies (not on income), extraterritorial application of DST (Digital service companies present outside India), etc.
- Indian reply: Several global tax measures like royalty, technical fees are not levied on revenue. Similarly, all US states have laws on remote sellers, and they tax non-US resident entities.
The second accusation, DST does not extend to identical services provided by non-digital service providers. This is a violation of trade practices.
- Indian reply: When the company is non-digital (i.e., brick and mortar) then that company is subject to Indian income tax. Further, this DST has been introduced to provide a level-playing field.
The third accusation, DST is discriminatory because it targets US companies.
- Indian reply: The DST is applicable to all digital service providers having an annual turnover of more than ₹2 crores in India-based digital services. As per USTR’s own analysis, only 119 companies in the world would likely be subject to the DST, of which 86 are U.S. companies. So the criteria do not target anyone. It is the result of the asymmetric digital power of US companies.
First, the DST as a tax policy targets a single sector (digital services). Economic experts argue that framing a tax policy to target a particular sector is unfair and have disastrous consequences for the growth of that sector.
Second, digital service providers might pass on the tax to consumers. Ultimately, burdening consumers. Just like service tax passed on to consumers, DST can also pass on to consumers if the service provider wishes.
Third, not feasible to separate the digital economy and the global economy. The growing digitization has blurred the line between them. This is one of the prime reasons due to which OECD is unable to arrive at a consensus.
Fourth, the DST might attract Retaliatory Tariffs. The USTR investigations pose a threat of retaliatory tariffs and might trigger the trade war between India and the US. Even the slightest retaliatory tariff will affect the Indian ICT industry’s growth.
First, India can follow the U.K. model of DST. The major advantages of the U.K. model are,
- The U.K. allows companies to not pay any tax if their net operating margin is negative. By including this, India can avoid criticisms like India’s equalization levy is on revenue and shift towards the profit of the company.
- India can consider taxing only 50% of the revenues from the transactions involving three jurisdictions. For example, an Australian user located in India receiving services from a U.S. company. This will make Indian DST more inclusive and also garners international support.
Second, India has to remain committed to the OECD process. Apart from that, India can mention the ways to tweak DST design or try to achieve consensus. This will make India move ahead and phase out DST and roll out the new agreed tax policy of OECD.
Third, the U.S. government has to realize the challenges in taxing digital service providers and also have to participate in these global talks. This will not be only beneficial for other countries but also a way to make these digital giants accountable.
More than 24 countries have either adopted or are considering adopting, a DST or a DAT after the concept got introduced in India. So the tax challenges posed by the digital economy is not a problem between India and the US. It is a global problem and the US has to accept this and act accordingly.
Strategic Disinvestment Policy: Issues and Challenges – Explained
COVID-19 pandemic has hit the Indian economy very hard. At once, due to lockdowns, Indian economy was dried out of funds. Economic activities got reduced drastically. At present, the Indian economy is in urgent need of a revenue stream so that all activities can go back to normal.
Government expenditure was expected to help the economy out, just like it did during the 2008 financial crisis. However, all these factors have also reduced the revenue and capital receipts of the government.
Now, the government has announced a large-scale monetization of government sector assets. It includes the sale of vast tracts of land and disinvestment receipts of ₹1.75-lakh crore.
Government Policy for strategic disinvestment
During Union Budget 2020-21 presentation, Government announced a new policy for strategic disinvestment of public sector enterprises. It will provide a clear roadmap for disinvestment in all non-strategic and strategic sectors. The government has aimed to receive Rs. 1,75,000 crore from disinvestment in BE 2020-21.
- The policy will cover existing Central Public Sector Enterprises (CPSEs), Public Sector Banks, and Public Sector Insurance Companies.
- The government has classified the public sector under 2 categories: 1. Strategic Sector and 2. Non- strategic sector.
- In Non-strategic sectors, the government will exit from all businesses. It will keep only a ‘bare minimum’ presence in four broad strategic sectors, i.e.
- Atomic energy, Space and Defence
- Transport and Telecommunications
- Power, Petroleum, Coal, and other minerals
- Banking, Insurance, and financial services
- The government will incentivize States for disinvestment of their Public Sector Companies. An incentive package of Central Funds for states will encourage them to do so.
The new disinvestment policy goes further than the past case-by-case approach and straight away allows the sale or closure of nearly 151 PSUs (83 holding companies and 68 subsidiaries) in non-strategic sectors.
Other than that, Government will monetize the surplus land with Government Ministries/Departments and Public Sector Enterprises. A Special Purpose Vehicle will be created in the form of a company to carry out monetization.
What is Disinvestment?
- Disinvestment means the sale or liquidation of assets by the government. It usually consists of Central and state public sector enterprises, projects, or other fixed assets.
- The government undertakes disinvestment to reduce the fiscal burden on the exchequer. It raises money for meeting specific needs, such as to bridge the revenue shortfall from other regular sources.
- Strategic disinvestment is the transfer of the ownership and control of a public sector entity to some other entity (mostly to a private sector entity).
- The disinvestment commission defines strategic sale as the sale of a substantial portion i.e. 50%, or higher percentage of the Government shareholding in a central public sector enterprise (CPSE). It also involves a transfer of management control.
- National Investment Fund (NIF) was constituted in November 2005. In this fund, the proceeds from the disinvestment of Central Public Sector Enterprises were to be channelized.
Need of disinvestment
- Under the aegis of the Atmanirbhar Bharat Mission, the rationalization of the participation of the CPSEs in commercial activities has been proposed.
- As per the experts, the involvement of the government should only be limited to ‘strategic sectors’. So that it can develop these crucial sectors of the economy with its full energy.
- This will encourage healthy competition in the non-strategic corporate sector. It will lead to an increase in their efficiency under the pressure of competition.
- Selling the non-productive companies will provide the government with non-debt revenue in this time of fund crunch. Moreover, it will increase the efficiency of the government investments in the Public sector.
Performance of disinvestment in the recent scenario:
- According to the Department of Investment and Public Asset Management (DIPAM), between 2004-05 to 2013-14, disinvestment raised Rs. 1.07 lakh crore, on an average yearly collection of Rs. 10,700 crores.
- However, from 2014-15 to 2017-18, the collection went up to Rs. 2.12 lakh crore, i.e., a yearly collection of Rs. 53,000 crores.
- The government has exceeded the target of Rs. 1 lakh crore in 2017-18 and Rs. 80,000 crores in 2018-19.
- The success of BHARAT-22 Exchange Traded Funds (ETF) takes government closer to the disinvestment target. The ETF is a benchmark to an index named BHARAT22 consisting of 22 companies (19 PSEs and 3 private).
- However, in 2020-21 due to the COVID-19 pandemic, the disinvestment process was hindered in between. It could only gather disinvestment revenues of Rs 31,000 crore against a target of Rs 2.1 lakh crore.
Challenges of disinvestment policy:
First, the Sale of profit-making and dividend-paying PSUs would result in the loss of regular income to the Government. It has become just a resource raising exercise by the government. There is no emphasize on reforming PSUs.
Second, the valuation of shares has been affected by the government’s decision not to reduce government holdings below 51 percent. With the continuing majority ownership of the government, the public enterprises would continue to operate with the earlier culture of inefficiency.
Third, Government is not willing to give up its control even after strategic disinvestment. It is evident from the budget speech of 2019-20 by the Finance Minister. She stated that government is willing to change the extant policy of government. It will change the policy of “directly” holding 51 percent or above in a CPSU to one whereby it’s total holding, “direct” plus “indirect”, is maintained at 51 percent. It means government will still exercise its control over PSUs.
Fourth, The process of disinvestment is suffering from bureaucratic control. Almost all processes starting from conception to the selection of bidders are suffering due to it. Moreover, bureaucrats are reluctant to take timely decisions in the fear of prosecution after retirement.
Fifth, Strategic Disinvestment of Oil PSUs is seen by some experts as a threat to National Security. Oil is a strategic natural resource and possible ownership in the foreign hand is not consistent with our strategic goals. For example, disinvesting Bharat Petroleum Corporation Limited (BPCL).
Sixth, Loss-making units don’t attract investment so easily. It depends upon the perception of investors about the PSU being offered. This perception becomes more important in the case of strategic sales, where the amount of investment is very high.
Seventh, Complete Privatization may result in public monopolies becoming private monopolies, which would then exploit their position to increase costs of various services and earn higher profits
Eighth, using funds from disinvestment to bridge the fiscal deficit is an unhealthy and short-term practice. It is said that it is the equivalent of selling ‘family silver’ to meet short term monetary requirements.
Way forward
Disinvestment and rationalization of some CPSEs are being planned. But there is also a need to strengthen the sectors retained by the government to fully meet the expectations.
For strengthening them, the government should take steps to completely revamp the Boards of the CPSEs and reorganize their structure.
The government should increase the operational autonomy in CPSEs. It can be supplemented by strong governance measures like listing on stock exchanges. It will increase the transparency in their performance.
The government must also try to provide the bidders with a fair valuation of the PSUs. It will boost their confidence in the disinvestment process.
The government should also avoid its involvement by any means in the management of operations of PSUs, after its strategic sale. Otherwise in the long run, it would discourage the buyers from investing in them.
Some steps taken by the Department of Public Enterprises will improve the performance of CPSEs. These are:
- The performance monitoring system of the CPSEs has been reformed.
- It has also improved the process of timely closure of sick and loss-making CPSEs and disposal of their assets.
Budget proposes tax on EPF interest
What is the News?
The government has proposed to make the interest earned on EPF contributions beyond ₹2.5 lakh Taxable.
Why has this proposal been made?
- The government has found instances where High Net Worth Individuals(HNIs) are contributing huge amounts to EPF. They are getting the benefit of tax exemption at all stages — contribution, interest accumulation, and withdrawal.
- Example: In 2018-19, ₹62,500 crores were deposited into EPF accounts by HNIs. The largest EPF account has a ₹103 crore balance.
- Hence, this proposal is aimed to exclude high net-worth individuals(HNIs) from the benefit of high tax-free interest income on their large contributions.
Employee Provident Fund(EPF) Scheme:
- EPF is a social security scheme under the Employees’ Provident Funds and Miscellaneous Provisions Act,1952
- Managed by: The scheme is managed under the aegis of Employees’ Provident Fund Organization (EPFO).
- Coverage: EPF accounts are mandatory for employees earning up to ₹15,000 a month in firms with over 20 workers.
- Contribution: Under the scheme, an employee has to pay a 12% contribution towards the scheme. An equal contribution is paid by the employer. The employee gets a lump sum amount including self and employer’s contribution with interest on both on retirement.
- Limit on Employer’s Contribution: In Budget 2020, the government had capped the contributions by employers into funds EPF or the National Pension Scheme at ₹7.5 lakh a year.
- However, government, as well as private-sector employees, are allowed to make voluntary contributions over and above the statutory deductions into the general provident fund(GPF) or EPF respectively.
Source: The Hindu
A normal budget for abnormal times
Synopsis: The recently released budget appears to be fairly normal. Normal is not sufficient for the abnormal times like the present.
Introduction
The economy contracted by 7.7% in India. The economic survey projects India’s real GDP growth to be 11% in 2021-22. However, this projection looks overestimated. India will have to surpass pre-covid-19 levels to achieve this growth; this will take at least two years.
- The budget required non-standard policy responses given the abnormal times for the economy. However, no such major changes were made to the budget.
- There is only a 1% increase in the overall expenditure of the government.
What are the issues in the budget?
The increase in capital expenditure is expected to be channelized through Investment in infrastructure, However, it is linked with 2 types of risks;
- If there is a delay in the completion of projects, it will lead to more spending.
- It will not provide instant multiplier effects to lift the demand. As the life cycle of these projects is very long.
There are no drastic reforms for the agriculture sector. For example, no rationalizing of the Public Distribution System issue prices of food grains.
- The cash transfers under the Pradhan Mantri Kisan Samman Nidhi Scheme (PM-KISAN) have not been increased.
Second, manufacturing growth would depend totally on private investments.
- There is a lack of concrete policies towards export promotion in the textile sector. This may weaken the competitiveness of manufacturing exports.
Infrastructure provisioning has unaddressed issues such as execution risk and regulatory issues. The introduction of a development finance institution addresses only one issue.
There is no proper plan to tackle urban unemployment. Employment and demand generation will depend on the impulses of growth cycles.
The target of reducing the fiscal deficit from 9.5% to 6.8% of GDP depends upon hypothetical factors, such as:
- Total revenue might get some boost from better tax revenue.
- A renewed hope for better divestment revenues.
The Budget sets out some impressive plans but does not provide the specific mechanisms to achieve those plans.
Although the Budget sets fixed some grand targets, it does not provide the precise mechanisms to achieve those.
Budget 2021: Despite some hits, the Budget has crucial misses
Evaluation of Budget 2021
Source: The Hindu
Gs2: Parliament and State Legislatures- Budgeting
Synopsis: The evaluation of Budget 2021 is done on three parameters. First, on the credibility of the Budget. Second, it’s potential to deliver adequate domestic output and jobs. Third, on how the Budget raises resources.
What is the Credibility of the Budget 2021?
- Budget 2021 scores high on credibility. Because, unlike previous budgets, Budget 2021 has taken into account the real estimates of revenue receipts. Moreover, it has recognised the ‘off-balance sheet’ expenditures.
- This has resulted in arriving at real fiscal deficit numbers that are much higher than expected. It is 9.5% of the GDP for FY21 and 6.8% of the GDP for FY22. But disclosing real fiscal deficit has the following Significance
- One, realistic revenue budgets will reduce the pressure on tax authorities to engage in tax terrorism.
- Two, it will allow governments to release its payments and refunds on time.
- Three, focus on the ‘real’ numbers will help in informed decision-making and planning to improve our fiscal balance.
Steps taken to provide adequate domestic output and jobs
- Budget 2021 signals a shift away from the revenue expenditure towards Capital Expenditure. Capital expenditure in FY22 is budgeted to increase by 26% over FY21 due to increased focus on areas such as infrastructure, roads, and textile parks.
- The budget also promises to improve health, education, nutrition and urban infrastructure.
- Along with this, efforts are being made to increase domestic jobs. It includes reform of labour laws, corporate tax rate cuts, and production-linked incentives.
What steps were taken to raise resources and improve investment?
- The Budget focuses to raise resources through disinvestment and asset sales, rather than via additional taxes. It reduces the tax burden on people.
- The Finance Minister also announced the creation of a new Development Financial Institution to facilitate and fund infrastructure investments.
- There were also efforts to revive our stressed financial services ecosystem. The Finance Minister announced the creation of a government Asset Reconstruction Company, or ‘bad bank’, to reduce the non-performing assets that are spread throughout the industry.
Way forward:
- The government should also help to revive other sectors who are suffering from chronic stress. Examples are financial services, power, real estate, telecom, airlines and shipping, contact-based services and micro, small and medium enterprises.
- Also, taking lessons from the global financial crisis in 2008, the government should not assume that a revival in consumption and government spending would automatically result in durable growth. Hence, the Government needs to make efforts to ensure adequate growth in domestic output and jobs.
Budget 2021: Continues with fiscal conservatism
Source: The Hindu
Gs2: Parliament and State Legislatures- Budgeting
Synopsis: A close analysis of Budget 2021 reveals that the Government is following the principle of fiscal conservatism. The policy of Fiscal spending was the need of the hour.
Why the government resorts to fiscal conservatism?
Falling revenues had forced the government to restrict its aggregate spending. Some of the issues that contributed to falling revenues are,
- A sharp reduction in corporate tax rates in September 2019,
- The underperformance of the Goods and Services Tax regime.
- Failure of government’s ambitious disinvestment agenda. The government was only able to collect ₹32,000 crores last year, compared to the plan of ₹2.1-lakh crore.
- The mandate of Fiscal Responsibility and Budget Management (FRBM) Act to reduce the fiscal deficit.
Because of the above reasons the Total expenditure for 2021-22 is projected to rise only by just 0.95% compared to revised estimates for 2020-21.
What are the signs of a continuation of Fiscal conservatism in Budget 2021?
- First, Allocation to MGNREGA and Food subsidies:
- According to the Budget 2021-22, the allocations for the MGNREGA programme is drastically reduced from the ₹1,11,500 crore spent in 2020-21 to ₹73,300 crores in 2021-22.
- Similarly, the allocation for food subsidies has been reduced from ₹4,22,618 crore in 2020-21 to ₹2,42,836 crore in 2021-22.
- MGNREGA and food subsidies supported the vulnerable section in a big way, in survival during lockdowns.
- Experts see this as neglect of responsibilities by the government to support the vulnerable and marginalized people.
2. Second, Allocation to health and wellbeing
As per the Budget, the government has increased its spending on health and capital expenditure.
- Health spending increased by 137% compared to the previous year. (From ₹94,452 crore in 2020-21 to ₹2,23,846 crore in 2021-22)
However, closer scrutiny of budget allocations for health suggests otherwise. For example,
- The expenditure on the Jal Jeevan Mission is included as a part ‘Health and Wellbeing’ expenditure. It has magnified the figures on Health expenditure.
- Also, an increase in Budget spending on Health is not reflected equally in the allocation for the Department of Health and Family Welfare. For example, the Budget estimate of the Department of Health and Family Welfare for 2021, shows a mere increase of 9.6% compared to last year.
3. Third, the allocation for infrastructure investment
As per the budget, Capital spending is increased by 35% compared to the previous year. (from ₹4.12-lakh crore in 2020-21 to ₹5.54-lakh crore in 2021-22)
But the Budget estimate for infrastructure will also not be adequate. Because of the following reasons,
- The government is planning to finance new investments in infrastructure through disinvestments of equity, strategic sale, and privatization of the public financial sector. It is expected to yield ₹1.75-lakh crore in 2021-22.
- However, after looking at the past performance of disinvestment targets, It is an overambitious target.
Even before the Pandemic recedes, the government seems on the path to restoring the old normal. i.e., Fiscal Conservatism. It is still continuing with the same path.
Budget 2021: Despite some hits, the Budget has crucial misses
Source: click here
Syllabus: GS – 3 – Economy
Synopsis: The recently released budget has got a few things right, but there are some issues as well.
Introduction
The government’s response to distress in the economy was below expectations. Public spending was just over 1% of GDP. It was in a situation when GDP growth was in the negative zone and the unemployment rate was high.
In this budget, the government has proposed increasing public investment by 34.5% in the upcoming fiscal year. It is a positive step for the economy.
However, the finances for investment depend upon several factors like tax revenue, Disinvestment proceeds, Sale of rail and road assets, etc.
How this Public Investment would be realized?
- Firstly, the government would increase public investment by borrowing. It will be an additional ₹80,000 crore for the purpose in the next two months.
- Secondly, states will be allowed a higher fiscal deficit, in the case of capital expenditure. If the capital expenditure plan outlined in the Budget speech is implemented with assured financial backing, it could revive the investment cycle.
- Third, the Development Finance Institution (DFI) proposed in the budget. There was a lack of long term credit for infrastructure in the last decade. The most successful industrializing economies have been utilizing DFIs for providing long-term credit.
What are the issues in the budget?
- First, DFI mentioned in the budget will be financed by foreign portfolio investments (FPI), which is a cause for concern. FPI represents short term inflows with exchange rate risks. This investment will certainly lead to currency and maturity miss-match, increasing the cost of capital.
- Second, the NFHS data for 2019-20 indicated that constructing toilets in households is of no use unless adequate access to water and sewage facilities are provided. Thus, the effectiveness of such investments depends upon coordination with other facilities.
- Third, the Budget has not mentioned the unemployment and migration crisis due to pandemics which led to the rise in economic inequality. The budget did not consider a special tax on the super-rich.
- Fourth, there is no targeted employment program to alleviate the immediate crisis is a matter of concern.
Way forward
- There is a need to consider alternative long-term sources, preferably from domestic sources, or international development agencies to make DFI a success.
Retrospective Taxation: Cairns Issue
Why in News?
Cairn Energy has asked the Government of India to resolve the retrospective taxation case. It has threatened to begin attaching Indian assets including bank accounts in different world capitals in case of non-resolution.
Background:
- The Permanent Court of Arbitration ruled in Dec. 2020 that the Indian government was wrong in imposing a retrospective tax on Cairn. It also asked the Indian government to pay for the damages to Cairn.
- Finance Ministry had said the government would study the verdict. It will take any action only after that.
Further Reading on Cairns Issue
What has Cairns said now?
- Now, Cairns has said that in case of inaction by India, it may take an extreme step such as attaching Indian assets including bank accounts in different world capitals.
- It has also cited clauses in the U.K.-India Bilateral Investment Treaty and the New York Convention to which India is a signatory.
Retrospective Taxation:
- It allows a country to pass a rule on taxing certain products, items, or services. This taxation is applied to the companies from a previous date i.e. before the date on which the law is passed.
- Countries correct anomalies in their taxation policies in the past by this step.
- Many other countries like the USA, the UK, the Netherlands, Canada, Belgium, Australia, and Italy have retrospectively taxed companies.
New York Convention:
- United Nations diplomatic conference adopted this convention in 1958 and entered into force in 1959.
- The Convention’s principal aim is that foreign and non-domestic arbitral awards will not be discriminated against. It obliges Parties to ensure such awards are recognized and generally capable of enforcement in their jurisdiction in the same way as domestic awards.
Source: The Hindu
What is disinvestment?
Disinvestment
- It means sale or liquidation of the public assets by the government. These are usually Central and state public sector enterprises, projects or other fixed assets.
- The government can sell its shares, where it is the majority shareholder (Owns more than 51% of shares). For example, Air India, Bharat Petroleum, Delhi Metro Rail Corporation, etc.
- The government can either reduce its share by selling a part of the company or can transfer its ownership to the highest bidder.
Main objectives of Disinvestment in India:
- Reducing the fiscal burden on the exchequer
- Improving public finances
- To improve the overall efficiency of PSUs
- Funding growth and development programmes
- Maintaining and promoting competition in the market
- Nodal Department: Department of Investment and Public Asset Management(DIPAM) under the Ministry of Finance, handles the disinvestment-related works for the government.
Are Disinvestments targets met by the government?
- Except in a few years, the government fails to reach the disinvestment target each year.
- In the current year of 2020-21, less than 3% of the targeted revenue is generated through disinvestment as of November 2020.
Source: Indian Express
What are off-budget borrowings?
Off Budget Borrowings:
- These are loans that are taken not by the Centre directly and are not calculated under the budget. These loans are taken by PSUs or other public institutions on the directions of the central government. Such borrowings are used to fulfill the expenditure needs of these institutions.
- Are these borrowings included in the fiscal deficit? The liability to repay these loans is not formally on the Centre. Thus, they are not included in the national fiscal deficit. This helps keep the country’s fiscal deficit within acceptable limits.
- CAG Report: In 2019, Comptroller and Auditor General report has pointed out that this route of financing puts major sources of funds outside the control of Parliament.
- How are off-budget borrowings raised? The government can ask a PSU to raise the required funds from the market through loans or by issuing bonds.
- Example: In the Budget 2020-21, the government paid only half the amount budgeted for the food subsidy bill to the Food Corporation of India. The shortfall was met through a loan from the National Small Savings Fund. This allowed the Centre to halve its food subsidy bill.
- What will be the fiscal deficit if we include off-budget borrowings? Due to various sources of off-budget borrowing, the true fiscal deficit is difficult to calculate. However, in July 2019, the CAG had pegged the actual fiscal deficit for 2017-18 at 5.85% of GDP instead of the government version of 3.46%.
Source: Indian Express
Issue of K-shaped recovery: How government budget can deal with it?
Synopsis –The macro-implication of K-shaped recovery and labour market pressure. How the government budget will deal with it?
Introduction-
- COVID Vs Economic Mobility – India has broken the link between COVID virus proliferation and mobility earlier and more successfully.
- India’s GDP estimates for 2020-21 show that the economy is expected to perform much better than earlier projections.
- However, the present economic recovery is very hopeful developments but, juxtaposed with a stronger-than-expected recovery, is confirmation of labour market scarring.
What are the present economic developments in India?
- Industrial sector - The large firms have endured the crisis better and are gaining market share at the expense of smaller firms.
- Although it will increase medium-term productivity, but it will also increase the dominance/pricing power of big companies in the market.
- Employment – CMIE’s [Centre for Monitoring Indian Economy] labour market survey reveals 18 million fewer employed (about 5 per cent of the total employed) compared to pre-pandemic levels.
- These labor market projections not incompatible with a sharper near-term rebound, as this recovery is led by capital and profits, not labour and wages
- Household sector – Households at the top of the pyramid are seen their incomes largely protected, and savings rates forced up during the lockdown, increasing ‘fuel in the tank’ to drive future consumption.
- Meanwhile, households at the bottom are likely to have witnessed permanent hits to jobs and incomes.
What are the implications of a K-shaped recovery?
K-shaped recovery happens when, following a recession, different sections of an economy recover at starkly different rates or magnitudes. The macro-implication of K-shape recovery in India are-
- Firstly, issue of Income- Upper-income households have benefitted from higher savings for two quarters. Present recovery is led by these savings.
- But lower-income households are facing loss of income in the forms of jobs and wage cuts. This will be a recurring drag on demand, if the labour market does not heal faster.
- Second, the issue of Consumption– To the extent that COVID has triggered an effective income transfer from the poor to the rich, this will be demand-hindering because the poor have a higher marginal propensity to consume (i.e. they tend to spend (instead of saving) compared to higher marginal propensity to import among rich.
- Consumption pattern– Passenger vehicle registrations (proxying upper-end consumption) have grown about 4 per cent since October while two-wheelers have contracted 15 per cent.
- Third, increases the inequality– COVID-19 reduces competition or increases the inequality of incomes and opportunities between rich and poor.
- This could affect the trend growth in developing economies by hurting productivity and tightening political economy constraints.
How upcoming budget may help India to deal with K Shape recovery?
Policy needs to look beyond the next few quarters and anticipate the state of the macroeconomy post the sugar rush, for the wellbeing of poor citizens and increase its income level.
- First, Policy will look for the private sector to start re-investing and re-hiring, and thereby sets the economy onto a more virtuous path. Barring that, the labor-market hysteresis could sustain with the manufacturing and service sectors.
- Private investment revival policy may be implemented first for recovery of the private sector.
- Second, Ensure exports should benefit from increasing global growth as the world gets vaccinated steadily.
- Third, Government may invest in large physical and social (health and education) infrastructure push. It may provide employment for who lost job due to COVID. It may reduce inequalities.
- Fourth, a reliable medium-term fiscal plan will be key to anchoring the bond market and underscoring an adherence to macro stability.
- Lastly, the investment model for public investment must be balanced to push and financed by aggressive public asset sales.
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Government ropes in I-T department to crack down on GST fraud
News: Government has roped in the Income Tax Department to tap illicit incomes as part of a crackdown against fraud companies rigging the Goods and Services Tax (GST) regime.
Facts:
- How did fraudsters cheat the Government? They have floated multiple dummy firms, obtained GST registrations, issued fake GST invoices without actual supply of services and passed on ineligible Input Tax Credit(ITC) accrued from the bogus invoices to clients for a commission who subsequently used it to make GST payments causing losses to the government.
- Reason for these frauds:
- Lack of due diligence during the GST registration: The process of registration was made easy and hassle-free by the government so that businesses could be easily on-boarded to the system. However, this meant that a number of dummy companies too obtained the GST registration in the absence of scrutiny or physical verification of the registered address of the companies.
- Lack of data exchange among the enforcement agencies and banks have also led to increase in fraud cases.
- What action has the government taken on this?
- Government has said that any income traceable to the use of fake bills and other GST frauds shall be considered concealed income and will attract severe penalties.
- Government has also tightened the GST registration process and legal measures to deal with the rising cases of fake invoicing.
Importance path How to increase economic recovery of India
Synopsis: Government should adopt a fiscal stimulus Path for the economic recovery of India, to make our economy grow at 9% GDP in the coming years.
Background
- The impact of the pandemic has pushed India to impose stringent lockdown measures to save millions of lives of Indian citizens but it’s after effect has caused massive economic disruption.
- This has resulted in fall of GDP by around 7.5 percent for this full year which has dented our aspiration to become a$5 trillion economy by 2024.
- Though nothing much can be done for what has happened, in the coming years India needs to get back to the trend line of growth (pre-COVID years) to sustain the aspiration of our young population.
How different sectors are performing currently?
- The sectors which have shown a positive sign of recovery are
- Pharmaceuticals and chemicals, the FMCG sector, the two-wheeler sector, Construction equipment’s driven by rural demand from sales to individuals, Capital goods.
- In contrast, Sectors that are still struggling for a full recovery are
- Mainly, the travel and tourism sector, real estate and construction sector, and retail which are significantly high employment sectors.
So, what steps must the government take?
Though the recovery underway is solid, but we need measures to sustain and deepen it. The government can do three things.
- First, the government should resort to fiscal stimulus by paying long-overdue government bills. Few examples are,
- Distribute the pending tax refunds, pay the bills of all companies (large and small), pay off the many arbitration award spending where the government has lost cases, and pay state governments their pending GST dues.
- Second, invest in public health infrastructure and centre should finance state government efforts to build an extensive public health network.
- While this will equip as to handle a possible second wave of the virus, on the other, it will spread confidence.
- Also, it is essential for the government to work in partnership with private sector hospitals.
- Third, invest massively in infrastructures such as roads, ports, logistics. Areas, where investment can be channelised, are,
- By Providing decent, accessible housing to improve the living conditions in slums across our cities by providing right public-private program.
- By providing cheap connectivity into our cities.
- Even, the 20 trillion infrastructure pipeline project that requires massive funding can be considered.
How the funds for the above will be sourced?
- To mobilize its resources that are needed to finance the above measures, the government can opt for a huge privatization programme (Disinvestment)
- Under this program, the government should intend to reduce its share-holding to 26 percent across public-sector banks, steel companies, oil companies, and every manufacturing company and hotel it currently owns.
- This announcement might trigger a big rally in the stock prices of PSUs, increasing return.
- To stem the protests due to big reforms,we are witnessing currently, the government should choose democratic methods for implementing them such as use of discussion papers for public comment, the debate in Parliament.
We need to act swiftly to regain from stunted recovery. We must use our economic crisis as an opportunity to set some bigger things right that we have ignored for too long.
Lack of fiscal support could stoke inequality
Context- India’s low level of fiscal spending could leave behind other problem and leads to inequality.
India has stood out in three distinct ways.
- Firstly, India seems to have broken the link between rising levels of mobility and COVID-19 cases. As of now the fear of increased mobility around the festive season stoking cases has not come to bear and the fatality rate continues to fall as the recovery rate rises.
- Secondly, India has seen amongst the smallest fiscal support packages globally, government expenditure has not grown in the year so far.
- Third, inflation is now a big problem, CPI inflation has been outside the 2-6% tolerance band for seven months in a row.
How small fiscal support link with inequality?
- The government’s fiscal packages were far too modest and indirect to achieve much, some part was not covered (like the urban poor), and overall outlays were small.
- Rise in inequality between large and small firms –Large listed firms saw a larger rise in profits and the smaller listed firms did not do as well.
- A combination of cost-cutting, lower interest rate environment, access to buoyant capital markets, and formalization of demand could also be a driver of the rise in individual-level inequality.
- Impacted larger number of people– small firms are more labour-intensive than large firms. Data shows that small firms have cut staff costs by much more than large firms.
- Widening wealth gap– The coronavirus pandemic has dealt a huge blow to India’s middle and low-income groups. This is likely to further widen the wealth gap between India’s rich and poor.
- For instance– Expensive passenger vehicle sales doing better than two-wheeler sales.
What are the negatives of rising inequality?
- Inequality could elevate inflation- People with higher incomes can offset rising inflation with rising incomes. Sadly, though, income inequality and rising inflation can entrap lower-income households in poverty.
- For example– India has had a troubled past with services inflation. once it takes a stronghold (for instance, in 2011), it remains elevated for a prolonged period (it averaged 7.7% in the 2011-13 period).
There are three possible reasons that services inflation rises quickly in 2021-
- Inequality could stroke prices– The large firms and their employees do relatively well through this period, they are likely to demand more services, stoking services inflation.
- Pent up service demand– As a vaccine comes into play, there could be a wave of pent-up (high-touch) services demand.
- The service providers did not do the regular annual price reset in 2020, and may do it jointly for two years, once demand picks up.
What need to be done?
- Inflation control could be the main task cut out for policymakers in 2021.
- RBI have to take steps to gradually drain the excess liquidity in the banking sector, provide a floor for short end rates and finally narrow the policy rate corridor by raising the reverse repo rate.
Issue of Retrospective tax cases; what should India do next?
Context: After Vodafone, India has lost its 2nd case to Cairn Plc at Permanent Court of Arbitration over a retrospective tax demand. Now, what are the options left with India and which one should it chose?
WHAT ARE THE CASES IN QUESTION?
- Very recently, Cairn Plc has won a case of retrospective tax against India at Permanent Court of Arbitration. Court has asked Indian government to pay for damages to the tune of $1.4 billion.
- Previously in this year only, Indian Government lost a retrospective taxation case to Vodafone, where government need to pay around ₹80 crore, if it doesn’t make any further appeal.
Now India has been left with the option of either conceding defeat and making payment to the companies or making further appeals. But cost-benefit analysis of both the option is necessary.
Read More – India lost Retrospective taxation case to Cairn
WHY GOVERNMENT SHOULD NOT MAKE ANY FURTHER APPEALS?
- Firstly, there is a need for attracting global investments to the country and any further appeal would put investors in a doubt.
- Secondly, the stance of the present government on the issue was different in the past. They called out the UPA government for setting free “tax terrorism” and “uncertainty” in the country by enacting retrospective taxation.
- The Centre has now filed an appeal in the Vodafone matter in Singapore because it cannot take a different stance on two similar cases. A similar appeal too can be expected on Cairn.
- Thirdly, it would further dampen India’s reputation as the court already noted that this was a breach of fair treatment under the UK-India bilateral investment treaty.
WHY GOVERNMENT SHOULD MAKE FURTHER APPEALS?
- Keeping in mind the cost on exchequer, the government should make further appeals. This verdict includes a sharp $1.4 billion payable as damages to Cairn.
- In the Vodafone case, the government would need to divide out around ₹80 crore if it were to accept defeat.
- Finance Minister Nirmala Sitharaman has repeatedly stated that India retains the supreme right to put taxes.
As a first step after this setback, government must analyse carefully all the available options with it, as India is already suffering from an economic slowdown and looking to strengthen its domestic manufacturing capability. Some of the available options might turn away the foreign investment and technology associated with it.
India lost Retrospective taxation case to Cairn
Synopsis: In a 2nd setback after Vodafone case, Indian government has lost an International arbitration case to energy giant Cairn, on the issue of retrospective taxation.
Introduction
- The Indian government has lost an international arbitration case to energy giant Cairn Plc over the retrospective levy of taxes, and has been asked to pay damages worth RS. 8000 crore to the UK firm.
- This is the second setback for Indian government related to retrospective taxation after it lost the arbitration case against Vodafone.
What is retrospective taxation?
Retrospective taxation allows a country to pass a rule on taxing certain products, items or services and deals and charge companies from a time behind the date on which the law is passed.
- Countries use this route to correct any anomalies in their taxation policies that have, in the past, allowed companies to take advantage of such loopholes.
Apart from India, many countries including the USA, the UK, the Netherlands, Canada, Belgium, Australia and Italy have retrospectively taxed companies.
What is the case?
The case pertains to the tax demand related to an alleged Rs24,500 crore worth capital gains it made in 2006 while transferring all its shares of Cairn India Holdings to a new company, Cairn India, and got it listed on the stock exchanges.
However, Cairn argued the retroactive application of a newly enacted law is a breach by India of its obligations under the Treaty [UK-India Bilateral Investment Treaty] to treat Cairn and its investments fairly and equitably and refrain from unlawfully expropriating Cairn’s assets.
- Owing to different interpretations of capital gains, the company refused to pay the tax.
- This prompted cases being filed at the Income Tax Appellate Tribunal (ITAT) and the High Court.
What is the verdict of Court?
The Permanent Court of Arbitration at The Hague has maintained that the Cairn tax issue is not a tax dispute but a tax-related investment dispute and, hence, it falls under its jurisdiction.
- India’s demand in past taxes, it said, was in breach of fair treatment under the UK-India Bilateral Investment Treaty.
- The GOI was ordered to compensate for the total harm suffered together with interest and cost of arbitration.
The order does not contain a provision for challenge or appeal. Moreover, Cairn can use the arbitration award to approach courts in countries such as the UK to seize any property owned by India overseas to recover the money if the award is not honored.
Way forward-
Government needs to assured global investors that concerns over retrospective taxation would be taken care of.
Why Indian Economy is slowing down?
What are the issues facing Indian Economy?
- COVID pandemic has pulled down the global economy and India’s economy is one of the worst affected among them.
- In the first quarter of the financial year (April-June), India’s economy had contracted by an unprecedented 23.9%. Whereas in the second quarter, after a bit improvement, economy contracted by 7.5%, less than the anticipation.
- With the result of 2nd quarter, India has slipped into the Technical recession, which requires economy to be negative or declining for two consecutive quarters or more.
- Although some economist argue that when growth rate is measured on quarterly basis, instead of year-on-year basis, India’s GDP plunged 25 per cent in 2Q20 and recovered by 21 per cent in 3Q20. Thus, India’s economy is not in the technical recession.
Before we move any further in this article to understand the causes behind slowing Indian Economy, first we need to understand the components of the GDP.
How to calculate GDP using Expenditure method?
Final goods and services produced in a country during a period of time are taken into account under expenditure method of calculating National Income or Gross Domestic Product. In this method final expenditure made by each stakeholder is taken into account.
Final expenditure is that part of expenditure which is undertaken not for intermediate purposes.
Following is the formula for calculating GDP by expenditure method;
GDP = C + I + G + (X − M)
- C (Consumption) represents the consumption expenditure by the households on Final goods and services, known as Private Final Consumption Expenditure (PFCE).
PFCE is the biggest component of the GDP and constitute around 55-57% of the GDP.
2. I (Investment) represents business investment on equipment. It includes Gross Fixed Capital Formation (GFCF) and Inventory.
- GFCF includes Investment made in the long-term assets by government and private sector and investment in residential units by business or households.
- Inventory investment includes investment for procuring raw materials and finished or unfinished goods.
Investment constitute around 30-32% of the GDP.
GFCF Includes investments from Government, Businesses and households. 25% of I is constituted by government investment (Centre, states and PSUs) and 35-40% each is that by the corporate (India Inc.) and non-corporate (MSMEs and household investment in real estate) private sector.
3. G (Government) represents sum of government expenditures on final goods and services including salaries, weapons, investments, etc., also known as Government Final Consumption Expenditure (GFCE).
It doesn’t include the investment in financial products.
GFCE constitute around 10-12% of India’s GDP.
4. X represents gross exports and M represents gross imports. Balance of both is called net exports.
What are the causes behind falling GDP growth?
Demand related issues (PFCE)
- Consumer demand is falling in urban India. Sales of domestic cars and commercial vehicles are on decline even before COVID pandemic. More than 2.1 crore individuals have lost salaried jobs due to the pandemic since April, and economists estimate the number to increase in future as companies struggle to run smoothly.
- While many of those didn’t lose their jobs, saw their salaries drastically reduced.
- Wage growth rate in rural area has declined to a new low. 10 million more rural households are seeking MGNREGA employment per month since August compared to a year ago.
Effect on the GDP
- Fall in income of households is leading to drastic fall in aggregate demand for goods and services i.e. Private Final Consumption Expenditure (PFCE). PFCE remains in the negative territory, at -11.3% in Q2. Private consumption demand, is the mainstay of the economy as it contributes around 55-60% of GDP.
- Loans for households are although easily available after government stimulus package, but due to uncertainty of the future income and savings, people are apprehensive of taking loans at present.
Investment and supply related issues (GFCF)
- Growth rate in eight core sectors is sluggish. That means even if the demand is improving industries will not be in the position to meet those demands.
- As per All India Manufacturers Organization’s June survey, about one-third of small and medium-sized enterprises indicated that their businesses were beyond saving.
- Unorganised sector, which is specifically dependent upon daily cash flows and lacking organised fund sources like loans and finance from the institutions, has been badly affected. This sector was already badly affected by demonetisation and GST, COVID pandemic has reduced the possibility of revival of many firms working in this sector.
Impact on the GDP
- Gross Fixed Capital Formation (as % of GDP) had been on a constant decline (except in 2018) between 2014 and 2019, falling from 30.1% to 27.4%. In Financial year of 2020-21, GFCF was contracted by 7.3% in Q2, compared to 47.1% in Q1.
Government expenditure related issues (GFCE)
- The central government’s total expenditure (both revenue and capital) has been declining sharply since 2010-11. From a high of 15.4% of the GDP in 2010-11, the total expenditure has hit a low of 12.2% of the GDP in 2018-19.
- The capital expenditure component has dropped from 2% of the GDP in 2010-11 to 1.6% in 2018-19 and that of the revenue expenditure from 13.4% in 2010-11 to 10.6% in 2018-19.
- This decline in expenditure is driven by the government’s priority to contain fiscal deficit.
Impact on the GDP
- Most worrying part for economy is a fall in government spending. Although government has announced stimulus package for revival of economy, but actual fiscal support has not been commensurate as expected. Government-Fixed Capital Expenditure (GFCE) growth has declined by 22.2% in 2nd quarter after improvement of 16% in the first Quarter.
Why government is not able to provide direct fiscal support?
- Centre’s net revenue (tax and non-tax) collection for the first half of this fiscal is merely 27.3 per cent of the budget for the full fiscal year.
- Center’s capital expenditure has registered a decline of 11.6 per cent. Capital expenditure is defined as the money spent on the acquisition of assets as well as fresh investments
- Market borrowings of both the Centre’s as well as the states’ have increased by 50 per cent year-on-year basis. Due to that India’s public debt/GDP will likely reach around 85 per cent. High debt-servicing costs will further crowd out productive public expenditure.
- Central government fiscal deficit is also inflating.
Why there is a need of direct income support from the government?
Although government has announced stimulus package for revival of the economy that includes benefits for industries, poor people and MSMEs etc., however all these benefits may not be able to provide economy with the immediate boost required at this point of time;
- At times of slowdown in industrialised economies, there is idle productive capacity on the one hand and unemployed manpower on the other.
- Unemployment reduces the purchasing power capacity of the households, resulting in low aggregate demand.
- Increase in Government expenditure or investment on infrastructure lead to expansion of productive capacity and generate long-term economic growth.
- While the infrastructure spending and reforms are critical to sustain medium and long term growth, neither can boost near-term demand. A stimulus package focused on giving direct benefits to the middle-class could help alleviate the situation.
- Increase in direct benefit transfers to people lead to immediate increase in aggregate demand of household for goods and services. Increase in aggregate demand leads to fuller utilization of the existing productive capacity and employment generation.
- Thus, Fiscal spending (government expenditure), as against fiscal conservatism, is favoured because this can be mobilised quickly to deliver results in a shorter timespan while others need longer timeframes to get activated and deliver.
- Bank recapitalisation for increasing credit flow in the economy is another way to boost demand in the economy.
Way forward
Present time demands government to discontinue its fiscal conservatism approach centred on reducing its fiscal deficit. It is the time to boost the domestic demand by transferring direct benefits, as was done during the 2008 economic recession. Indian economy at that time proved to be resilient and performed far better compared to many developed countries at that time.
Private sector in India is not lacking funds as is the popular perception. It is the lack of confidence in the Indian economy and industries at present that investment in India are reducing. There are sufficient funds available for the government borrowings in the market.
Modernise India’s archaic tax laws
Context: Need to modernise India’s archaic tax laws.
Background:
- The Income Tax Act was framed in 1961 and has been amended several times.
- The government constituted the Akhilesh Ranjan Task Force to suggest reforms to the Income Tax Act.
- The report has been submitted to the government but has not yet been made public.
People who gained during the Pandemic?
- India’s super rich: Between January and June 2020, 85 new Indians were added to the list of High Net worth Individuals (with a net worth of more than $50 million).
- Stock dealers: When the Indian GDP was contracting, some stocks surged to phenomenal heights there by benefitting those dealing in stock exchanges.
- The corporate houses, Internet service providers, laptop makers and scientists engaged in medical research also gained.
- The manufacturers of masks and Personal Protective Equipment also gained during the pandemic
What are the problems in taxation?
- Implementation of Equalisation Levy: Through Digitalisation and e-commerce multilateral corporates have found an easy way to make big money. However, the tax administration is struggling with the implementation of the equalisation levy.
- Implementation of Anti profiteering rules under GST: As per the Goods and Services Tax (GST) law, any reduction in the rate of tax on the supply of goods or services has to be passed on to the consumer by way of commensurate reduction in prices. Companies are getting benefited from GST rate reduction without passing on the benefits to the end consumers.
- Tax evasion: Tax avoidance by global web companies has become acute because of Digitalisation.
- Tax dispute settlement: The International Court of Arbitration ruled that the Indian government’s move to seek taxes from Vodafone using retrospective legislation was against the fairness principle.
What can be done?
- Digital taxation has to be amended in accordance with the UN Model Convention. There is need for India to act in sync with the OECD.
- The Anti-Profiteering Rules have to be implemented vigorously wherever there is reduction in the tax rate on any commodity or service
- Need to find a suitable mechanism to negotiate settlement through mediation or conciliation or, if necessary, arbitration in connection with tax disputes between the tax-paying companies and the Central Board of Direct Taxes.
Our archaic laws should be modernised and made compatible with international tax laws. The suggestions made by Akhilesh Ranjan Task Force needs to be implemented after wide consultation.
Government interventions
Context – The Government’s core belief in ‘minimum government’, which ties its hands when it comes to fiscal measures even in such harsh economic conditions.
What are the reasons for the failure of stimulus packages?
- Lack of Demand– The aggregate demand for goods and services again is dependent on the income and purchasing power of people, which has come down drastically, at the aggregative level, due to the COVID-19 lockdown.
- Nothing to stimulate demand – many economists have opined that the government stimulus tries to resolve only supply-side issues. There is nothing to generate demand. This could only be done by putting money in the hands of people.
- Risk of taking housing loans – Though the consumer or housing loans are easily available at lower rates of interest, still people are not taking the household loans, as they are in doubt of their future incomes or dwindling current one.
- Bank burdened with bad loans- On the supply side, the big constraint on fresh lending is the burden of non-performing assets (NPAs).
- Credit easing will not work immediately– Credit easing by the RBI is not direct government expenditure and banks will be hesitant to lend the money available with them.
What are the possible solutions?
- Relax FRBM target– Fiscal Responsibility and Budget Management (FRBM) should be kept in a state of suspension for both Centre and the States.
- Cash transfer to Households– The government needs to announce a ₹10 lakh crore fiscal stimulus package providing universal food ration and cash transfers for households in order to revive the economy at this time.
- An urban employment guarantee law– This could help improves worker incomes and have multiplier effects on the economy.
- Improving health infrastructure– The government needs to build a robust public health infrastructure on the principle of public provisioning instead of walking down the insurance route.
- Investment in Green Deal- – A comprehensive green deal can be planned, which changes the energy mix of the economy and also makes the poor and the marginalized a part of a sustainable development process.
Way forward-
The current COVID-19 pandemic has given an opportunity to rethink of health, economic and climate policies.
Atmanirbhar Bharat 3.0
Context- Finance Minister Nirmala Sitharaman announced the next set of stimulus package to boost the coronavirus-hit economy.
What are the key highlights of 3rd stimulus package?
Union Finance Minister on recently announced a third stimulus package to help pull the Covid-19-battered economy. The FM announced 12 measures under Atmanirbhar Bharat3.0 which includes-
- Atmanirbhar Bharat Rozgar Yojana.
- Emergency Credit Line Guarantee Scheme (ECLGS) 2.0.
- Atmanirbhar Manufacturing Production-Linked Incentives for 10 champion sectors.
- To boost demand in Real Estate sector, relief for home buyers and sellers.
- Support for construction and Infrastructure- Relaxation of EMDs and Performance Security on government tenders.
- Income tax relief for homebuyers and developers.
- Infrastructure Debt Financing.
- Support for Agriculture.
- Boost for rural employment.
- Boost for Project Exports.
- Capital and Industrial Stimulus.
- Research and Development grant for Covid-19 vaccine.
Previously announced package-
- Pradhan Mantri Garib Kalyan Yojana (PMGKP) – The government had announced Rs 1.70 lakh crore during March to protect the poor and vulnerable sections from the impact of COVID-19 crisis.
- The Aatmanirbhar Bharat Abhiyan package– The stimulus of Rs 20.97 lakh crore in May, largely focused on supply-side measures and long-term reforms.
What are the key areas of focus of this fiscal package?
- Incentivizing job creation-
- Boost formal sector employment-Providing incentives to EPFO-registered firms to hire more employees could lead to job creation. Formalization of the existing informal work force in urban areas.
- MGNREGA boost– Further additional outlay of Rs 10,000 crores will be provided for PM Garib Kalyan Rozgar Yojana in the current financial year.
- To boost demand in Real estate sector –
- Rs 18,000 crores additional outlay for PM Awas Yojana (Urban) over the Budget Estimates for 2020-21. This is over and above Rs 8,000 core already this year.
- This will help 12 lakh houses to be grounded and 18 lakhs to be complemented.
- The scheme will also guarantee additional jobs to 78 lakhs.
- To boost manufacturing production-
- Production Linked Incentives with proposed expenditure of ₹1.46 lakh crore over five years will be offered to ten stressed sectors to boost domestic manufacturing.
- And create an efficient domestic manufacturing ecosystem.
- To Research and Development grant for Covid-19 vaccine-
- Rs 900 crores provided for Covid-19 Suraksha Mission for the development of the Indian vaccine to the Department of Biotechnology.
- Emergency Credit Line Guarantee Scheme (ECLGS) 2.0-
- EECLG 2.0 for MSMEs, businesses, MUDRA borrowers and individuals (loans for business purposes), has been extended till March 31, 2021.
- Under this credit scheme, banks will be able to lend to stressed sectors from 26 sectors identified by the K.V. Kamath committee earlier this year.
- The new scheme will have a 1-year moratorium and 5 years of repayment.
What are the challenges to India’s economic recovery according to RBI?
- The foremost risk stems from the global economy now at risk from the second wave of COVID-19.
- The Second major risk is the stress that has been intensifying among households and corporations
Way forward-
- Ensuring credit off-take of previously announced schemes amongst the poorest sections must be a priority.
- Forcing banks to lend to companies where assessing risk has become a challenge due to the pandemic puts banks at a bigger risk.
The Weakened financial capacity of States
Context- With various measures the Centre government has reduced of the fiscal resource capacity of the States.
What are the reasons of weakened fiscal capacity of States?
- Impact of Implementation of GST on States– Since implementation, the Goods and Services Tax appears to have reduced the resource-generating capacity of States and has contributed to worsening inter-State inequality
- Centre undermines fiscal capacity of States-
- Cutbacks in devolution – Centre has systematically cut the share of States in taxes raised by the Union government.
- Between 2014-15 and 2019-20, the States got ₹7,97,549 crore less than what was projected by the Finance Commission.
- Shrinking of divisible pool- Centre has reduced the pool of funds to be shared with the States by shifting from taxes to cesses and surcharges.
- The Constitution allows the Centre to levy cess and surcharge which the Centre need not share with state governments.
- When taxes are replaced with cesses and surcharges, consumer pays the same price. But the Union government keeps more of that revenue and reduces the size of the divisible pool. As a result, the States lose out on their share.
- GST shortfall–
- The GST Compensation Act, 2017guaranteed States that they would be compensated for any loss of revenue in the first five years of GST implementation, until 2022, using a cess levied on sin and luxury goods.
- However, the economic slowdown has pushed both GST and cess collections down over the last year, resulting in a 40% gap last year between the compensation paid and cess collected.
- Central grants are also likely to drop significantly this year.
- For instance,₹31,570 crore was allocated as annual grants to Karnataka. Actual grants may be down to ₹17,372 crore.
What are the Impacts of colossal borrowing on States?
- Repayment burden will overwhelm State budgets for several years.
- Budget issue – After paying loans and interest, salaries and pensions, and establishment expenses, nothing left for development and welfare.
- The fall in funds for development and welfare programmes will adversely impact-
- The livelihoods of crores of Indians.
- The economic growth potential cannot be fully realized.
- Adverse consequences will be felt in per capita income, human resource development and poverty
Way forward-
- The systematic weakening of States serves neither federalism nor national interest. Therefore, The Centre must take several steps to ensure an adequate flow of resources to states.
- Centre must immediately clear all its pending dues to state governments.
GST Compensation Cess
What is Cess?
- A cess is an earmarked tax that is collected for a specific purpose and ought to be spent only for that.
- Cess may initially go to the CFI but has to be used for the purpose for which it was collected.
- Cess collections are supposed to be transferred to specified Reserve Funds that Parliament has approved for each of these levies.
- Every cess is collected after Parliament has authorised its creation through an enabling legislation that specifies the purpose for which the funds are being raised.
- Article 270 of the Constitution allows cess to be excluded from the purview of the divisible pool of taxes that the Union government must share with the States.
What is GST Compensation Cess?
- The Goods and Services Tax in India is a comprehensive, multi-stage, destination-based value-added indirect tax. It has replaced many central and state indirect taxes in India such as the excise duty, VAT, services tax, etc.
GST compensation: As per the GST (Compensation to States) Act, 2017, states are guaranteed compensation for revenue loss on account of implementation of GST for a transition period of five years (2017-2022). - The compensation is calculated based on the difference between the current states’ GST revenue and the protected revenue after estimating an annualised 14% growth rate from the base year of 2015-16.
- Any shortfall has to be compensated from the receipts of Compensation Cess imposed on selected commodities that attract a GST of 28 per cent.
- At present, the cess levied on sin and luxury goods such as tobacco and automobiles flow into the compensation fund.
- But the issue was created when during Pandemic govt. denied paying compensation cess due to low revenue collection.
Centre gives in, says will borrow to make up for states’ GST shortfall
News: The Central government has decided to borrow up to Rs 1.1 lakh crore on behalf of the states to meet the shortfall of Goods and Services Tax(GST) compensation.
Facts:
- Borrowing Mechanism: Under the Special Window, the estimated shortfall of Rs 1.1 lakh crore will be borrowed by Centre in appropriate tranches.The amount so borrowed will be passed on to the States as a back-to-back loan in lieu of GST Compensation Cess releases.
- Will the borrowing impact the fiscal deficit of the Centre? The borrowing will not have any impact on the fiscal deficit of the Centre as the amounts will be reflected as the capital receipts of the States and as part of the financing of its respective fiscal deficits.
- Significance: The Centre borrowing on behalf of states is likely to ensure that a single rate of borrowing is charged and this would also be easy to administer.
Additional Facts:
- GST Compensation Cess: Under the GST (Compensation to States) Act, 2017, states are guaranteed compensation for loss of revenue on account of implementation of GST for a transition period of five years between 2017 and 2022.At present, the cess levied on products considered to be ‘sin’ or luxury goods.
Infrastructure and manufacturing led growth in India
Source-Live Mint
Syllabus- GS 3- Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment.
Context- India needs to create 90 million non-farm jobs by 2030 to avoid economic stagnation.
What is the importance of these two sectors?
- Construction- 24 million non-farm jobs could come from construction alone by 2030, 16 million from real estate and 8 million from infrastructure.
- Manufacturing- Thus sector could generate one-fifth of the incremental annual GDP (about $750 billion) and close to 11 million new non-farm jobs by 2030.
How India can trigger construction growth and what are the reforms needed?
To generate its share of employment, the construction sector needs to grow at about 8.5%, nearly double its 4.4% growth rate over financial years 2012-13 to 2018-19. The following steps can trigger this growth-
- Spend about 8% of GDP on infrastructure annually for the next 10 years.
- Build 25 million affordable homes over the decade.
Reforms required-
- Real estate reforms-
- India could include generously increasing incentives for home-ownership and creating rental stock.
- Tax incentives– At the central level, substantially raising tax deductions limits on mortgages and rental incomes, as well as introducing tax incentives for investments in rental housing stock could be considered.
For example- The US, which offers tax-deductible interest of up to $750,000 on mortgage loans and an effective low-income housing tax credit incentive.
- Rationalizing stamp duties and registration fees, introducing regulatory amendments in rent-control policies, launching digitally-enabled, single-window clearances to reduce time delays in affordable housing construction.
- Bringing the goods and services tax on modern construction methods in line with in-situ buildings.
- High land-price-to- average-income ratio– In terms of per square-meter price to per-capita GDP, it is about 6.0 in Mumbai and 3.8 in Bengaluru versus 0.5 in Bangkok and 0.2 in Beijing. To narrow this gap, India could do two things.
- Release 20 to 25% of underused but buildable public-sector land.
- Reform zoning regulations in the top 300 cities by population.
What are the proposed ways to turbocharge Manufacturing
- Structural reforms– India could introduce targeted, time-bound and conditional incentives to reduce the cost disadvantage that Indian manufacturers face while competing with companies from China and Vietnam, among other countries.
- Free trade warehousing zones– Indian states could also create powerful demonstration effects by establishing port-proximate manufacturing clusters that contain free-trade warehousing zones.
- They could provide land at lower costs, plug-and-play infrastructure, and common utilities, apart from expedited approvals.
- Reduction in costs– India also needs to consider reducing its factor costs of power and logistics. Both these costs could be reduced 20–25% by enabling franchised and privatized distribution company models, reducing cross-subsidy surcharges, and establishing multi-modal freight ecosystems.
Way forward-
- If adequately set up for success, manufacturing and construction could be pivotal in driving India’s growth over the next decade.
- The government has to introduce sector-specific policies to raise productivity in manufacturing and real estate sectors.
Governance of Public sector units: Privatization of SAIL
Source- The Hindu Business Line
Syllabus- GS 3- Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment.
Context- To decentralize decision-making and facilitate more informed investment decisions, the Centre has restructured the board of Steel Authority of India (SAIL).
How Privatization of SAIL can boost their business?
The Appointments Committee of the Cabinet (ACC) has approved the restructuring of the Board of Steel Authority of India Limited (SAIL).
- Decentralization– This move will facilitate greater decentralization and nimble decision making with the directors-in-charge of plants as direct ACC appointees with their views having weight in the central corporate governance structure.
- This will also facilitate speedy modernization and expansion programme of SAIL.
- This decentralization will also ensure there is greater transparency.
- Attract investment– The government’s exit will attract private investment and contribute to the exchequer, enabling higher public investment.
What is CPSEs?
Central public sector enterprises (CPSEs) are those companies in which the direct holding of the Central Government or other CPSEs is 51% or more.
Role- CPSEs have always played a crucial role in executing the socio-economic development agenda of the government as an extension of the government apparatus.
- During recent lockdown period, CPSEs ensured that essential services such as power, fuel and food-grain supply remain uninterrupted.
- They are carrying out capital expenditure works/infrastructure development activities of approximately ₹2 lakh crore in the sectors of petroleum, power, defence, mining, logistics, etc.
- CPSEs not only act as a catalyst for other economic activities but would also provide informal employment during the construction phase.
What are the arguments in favour of privatization?
- Efficiency– One of the strongest arguments in favour of privatization aired by its supporters is the dismal performance of the PSEs and, thus, its inefficiency can be removed if these enterprises are privatized.
- Governments jobs are often taken for granted and have no difference between a performer and a non-performer when considering productivity.
- Privatization will usher in an improvement in efficiency and as improved performance is concerned with ‘profit-oriented’ decision-making strategy.
- Lack of political interference– Indian PSEs are subject to too much governmental and political interference thereby making them operationally inefficient. Private sector is free from such unavoidable interference. They are motivated by political pressures rather than sound economic and business sense.
- A most important component in enhancing the performance of a PSU is reduced intervention by political powers and preventing misuse of infrastructure by all.
Way forward-
- Privatization has become a popular measure for solving the organizational problems of governments by reducing the role of the state and encouraging the growth of the private sector enterprises.
- Privatization should be in a unique form in accordance with the priorities of our mixed economy and as well as by considering operational aspects of the PSUs.
GST Compensation Issue
Source: Indian Express
Context: Recently, the Centre has acceded to the states’ request, that it will borrow Rs 1.1 lakh crore to compensate them for the shortfall in their GST revenues.
What is the Background?
- For bringing the states in to GST ambit, The Centre assured the states of a 14 per cent growth in their GST revenues.
- It also agreed to compensate states for shortfall in GST revenue collection for 5 years.
- GST compensation was decided to pay out of Compensation Cess every two months by the Centre.
- Now, the pandemic impact has resulted in low Cess collection that has constrained Compensation to states.
- With expected revenue shortfall of Rs 3 lakh crore, the collections through the compensation cess stand at Rs 65,000 crore.
- Now, out of the shortfall of Rs 2.35 lakh crore the state governments are being compensated only for losses arising on account of implementation issues that is Rs 1.1 lakh crore.
- The states were asked to forgo the remaining loss in GST revenues (1.34 lakh crore) as it has arised out of an “act of god”.
Why Centre has to borrow not the states?
- The Centre’s borrowing attracts a lower interest rate as compared to that of states.
- Also, the loans to the states will be at a uniform rate that will help them to avoid interest rate differentials across states.
- This mechanism is more preferable and convenient rather than all the states rushing to the bond market.
What are the unresolved issues?
- Increased debt: The mode of the transaction has not yet clearly defined. Irrespective of the mode of transaction, centre’s borrowing will lead to a rise in general government debt.
- Centres reluctance to borrow entire amount: The repayment of the loan is not an obligation of the Centre, and will be met from proceeds from future compensation cess collections still centre is reluctant to borrow the entire expected shortfall of Rs 2.35 lakh crore
The Centre’s decision to borrow Rs 1.1 lakh crore is in the spirit of cooperative federalism. Given the huge distress in the economy even the states should show some flexibility, in the spirit of cooperation. The GST Council should approach the issue of compensating states for their remaining losses in a conciliatory manner.
Retrospective taxation – Vodafone case
Source- The Hindu
Syllabus- GS 3- Role of external state and non-state actors in creating challenges to internal security.
Context– The Vodafone Group has won one of the most high-stakes legal battles involving a foreign investor and the Indian state under international law. The retrospective taxation was in violation of the BIT and the United Commission on International Trade Law (UNCITRAL).
What is the case
- In May 2007, Vodafone bought a 67% stake in Hutchison Whampoa for $11 billion.
- In September that year, Indian government raised a demand of Rs 7,990 crore in capital gains and withholding tax from Vodafone, saying the company should have deducted the tax at source before making a payment to Hutchison
- In 2012, the Supreme Court ruled in favour of the Vodafone group.
- Later, the same year, the then Finance Minister, the late Pranab Mukherjee, circumvented the Supreme Court’s ruling by proposing an amendment to the Finance Act, thereby giving the Income Tax Department the power to retrospectively tax such deals.
- Vodafone then initiated arbitration in 2014 invoking the Bilateral Investment Treaty signed between India and the Netherlands in 1995.
- Ruling: It ruled in favour of Vodafone as the taxation was in violation of the BIT.
- The tribunal said that now since it had been established that India had breached the terms of the agreement, it must now stop efforts to recover the said taxes from Vodafone.
- It also directed India to pay £4.3 million ($5.47 million) to the company as compensation for its legal costs.
What is retrospective taxation?
Retrospective taxation allows a country to pass a rule on taxing certain products, items or services and deals and charge companies from a time behind the date on which the law is passed.
- Countries use this route to correct any anomalies in their taxation policies that have, in the past, allowed companies to take advantage of such loopholes.
- Apart from India, many countries including the USA, the UK, the Netherlands, Canada, Belgium, Australia and Italy have retrospectively taxed companies.
What are the key lessons from Vodafone case?
- Compensation cost- The tribunal has ordered India to reimburse legal costs to the tune of more than ₹40 crore incurred by Vodafone in fighting this case.
- The taxpayer’s money will be used to pay Vodafone
- Key lesson is that three organs of the Indian state — Parliament, executive, and the judiciary — need to internalize India’s BIT and other international law obligations. These organs need to ensure that they exercise their public powers in a manner consistent with international law, or else their actions could prove costly to the nation.
What option does government has to solve the issue?
- Challenge the ruling– government might challenge the award at the seat of arbitration or resist the enforceability of this award in Indian courts alleging that it violates public policy.
- The government would be ill-advised to go down this road because it would mean that India does not honour its international law obligation.
- It would send a wrong signal to foreign investors reaffirming the sentiment that doing business in India is indeed excruciating.
- India is entangled in more than a dozen such cases against companies over retrospective tax claims and cancellation of contracts. The exchequer could end up paying billions of dollars in damages if it loses.
Way forward
Government should immediately comply with the decision to support foreign investment. The decision shows the significance of the ISDS (Investor-state dispute settlement). Regime to hold states accountable under international law when in case of undue expansion of state power. The case is a reminder that the ISDS regime, notwithstanding its weaknesses, can play an important role in fostering international rule of law.
GST Compensation disagreement between the Centre and the States
Source- The Hindu
Syllabus- GS 3- Government Budgeting.
Context- The onus would be on Centre to resolve this impasse with regard to compensation cess of GST reforms.
What is GST compensation?
- The Centre is obliged to pay to the States, for a period of five years, compensation for revenue shortfalls in return for their having ceded the power to levy the multiple taxes that were subsumed into the GST.
- The compensation is calculated based on the difference between the states current GST revenue and the protected revenue after estimating an annualized 14% growth rate from the base year of 2015-16.
What is current GST compensation situation?
- Pending payment– GST compensation payments to states have been pending since April, with the pending amount for April-July estimated at Rs 1.5 lakh crore.
- GST revenue gap– The GST compensation requirement is estimated to be around Rs 3 lakh crore this year, while the cess collection is expected to be around Rs 65,000 crore – an estimated compensation shortfall of Rs 2.35 lakh crore.
What were the Options given by the Center to the States?
Options made by the Centre-
Option 1 –
- To provide a special borrowing window to states, in consultation with the RBI, to provide Rs 97,000 crore at a “reasonable” interest rate and this money can then be repaid after 5 years by extending cess collection.
- A 0.5 percent relaxation in the borrowing limit under the Fiscal Responsibility and Budget Management [FRBM] Act would be provided.
Option 2–
- To meet the entire GST compensation gap of Rs 2.35 lakh crore this year itself after consulting with the RBI.
- No Fiscal Responsibility and Budget Management Act relaxation has been mentioned for this option.
Issues raised by the States-
- Several Sates have rejected both options and some, including Tamil Nadu- have urged the Centre to rethink in view of their essential and urgent spending needs to curb the pandemic and spur growth.
- Enforcing a cut in compensation and bringing in a distinction between GST and Covid-related revenue loss is unconstitutional.
- The two options offered to the States would impose huge debts on the states and as a result many would not even be able to pay salaries.
- States simply do not have the headroom to borrow money to make up for the GST shortfall as every single State has reached its FRBM [Fiscal Responsibility and Budget Management] limit.
What are the expected reasons for Revenue shortfall for the fiscal year 2020-21?
- Corporate tax collection loss – Companies in sectors such as airlines, hotels and consumer durables will show losses and therefore, pay less tax.
- Less income tax collection– Large numbers of workers have lost employment and/or have faced salary cuts. Many private firms are also likely to incur losses. So, income tax collection will also be short by much more than 20%.
- Less import – The Integrated Goods and Services Tax (IGST) and customs duties will also decline with fall in import.
- The production of luxury and sin goods has been severely impactedand they pay the high rate of tax — 18%, 28% and cess on top.
- The direct tax/GDP per cent may be expected to fall from 5.5% last year to less than 4% this fiscal.
Way forward
Center needs to renege on its promise to find ways to compensate the state for loss of revenue. Only the Centre is in a position to do such massive borrowing as Reserve Bank has itself said that for the Central government to borrow would be both easier and simpler. Central government would pay 2% less interest than the states.
India’s Tax Charter
Source: Indian Express
Syllabus: GS3: issues relating to Planning, Mobilization of Resources
Context: In the wake of pandemic and slowdown in the economy, tax system needs efficiency in case selection and consistency in assessment.
Need of efficient tax system:
- To improve tax collection:An economic contraction this year will deal a severe blow to tax collections.
- Rising uncertainty and reducing ability to pay: With a shrinking tax base, any calibration of rates or the tax base is difficult since a hurried approach can have wider consequences.
- Limited policy space: the only tool available to the government to maintain its tax base is to urge voluntary compliance.
- To increase compliance: compliance is achieved through a fine balance between enforcement and encouragement. Compliance is also a function of the perception of the administration.
- Enforcement-driven measures are less effective: the taxpaying population has remained at a fraction (6 per cent) of the total population even after strict enforcement driven measures.
- To encourage people: complexity can discourage individuals from filing returns. For instance, complexity is reflected simply in the difference between the number of taxpayers and the returns filed — the former exceeds that latter by around 20 million.
- To Build trust between the administration and the taxpayer:the government has announced measures to usher in transparency in the system. This includes a taxpayer’s charter and faceless assessments.
- India’s new charter includes:
- Confidentiality, right to representation and fair treatment which are in line with global practices.
- India’s citizen charter also specifies timelines for completion of different administrative processes.
- India’s charter conveys a commitment to reducing compliance costs in administering tax legislation, holding its authorities accountable and publishing a periodic report of service standards.
- To end personal interface, e-assessment was introduced in 2019, wherein a taxpayer could digitally respond to any query related to their return.
- Faceless assessment: It seeks to automate the case selection and the distribution function of the assessing officer — assessment, scrutiny and drafting order — among various units located outside the jurisdiction of the taxpayer which will reduce corruption and delays.
- This does not apply to search and seizure cases, and cases related to tax evasion and international taxation.
Concerns:
- Poor Dispute resolution leading to poor success rate:There is evidence of inconsistent and delayed decisions often culminating in the poor success rate of the tax department at various levels of dispute.
- Tax returns can be voluminous and the information contained therein can be unique. Therefore, taxpayers must ideally have an opportunity to explain their case in person.
Way forward:
- It is critical that the details of tax charter are spelt out concerning how these may be implemented in practice. There is urgent need of swift coordination for the implementation of the tax Charter.
- A tax ombudsman is needed to ensure that some of these standards are met.
- Fair and impartial system and a time-bound resolution of matters: the new processes, with reviews and anonymity, must ensure efficiency in case selection and consistency in assessment.
GST compensation Standoff
Source- The Hindu
Syllabus- GS 3- Government Budgeting
Context- Differences of opinion have emerged between Centre and states at the 41st Goods and Service Tax [GST] Council meeting over compensation deficit.
- GST- Goods and Services Tax, is an indirect tax which has replaced many indirect taxes in India such as the excise duty, VAT, services tax, etc. GST is a single domestic indirect tax law for the entire country.
GST [Compensation to States] Act, 2017
- States are guaranteed compensation for loss of revenue on account of implementation of GST for a transition period of five years (2017-22).
- The compensation assures an annualized 14% growth rate from the base year of 2015-16.
- States no longer possess taxation rights after most taxes, barring those on petroleum, alcohol, and stamp duty, were subsumed under GST.
Distinction in shortfall
- Pending payment– GST compensation payments to states have been pending since April, with the pending amount for April-July estimated at Rs 1.5 lakh crore.
- GST revenue gap – The GST compensation requirement is estimated to be around Rs 3 lakh crore this year, while the cess collection is expected to be around Rs 65,000 crore – an estimated compensation shortfall of Rs 2.35 lakh crore.
Options made by the Centre
Option 1 –
- Special borrowing window – To provide a special borrowing window to states, in consultation with the RBI, which has to be repaid by the states after 5 years.
- A 0.5 percent relaxation in the borrowing limit under the Fiscal Responsibility and Budget Management [FRBM] Act would be provided.
Option 2–
- Meeting the GST compensation gap of this year.
- No Fiscal Responsibility and Budget Management Act relaxation has been mentioned for this option.
Challenges for central government
- Options rejected– Several States have rejected both options. Some states like Tamil Nadu, have urged the Centre to rethink in view of their essential and urgent spending needs to curb the pandemic and spur growth.
- Compensation cess levied on demerit goods will stay on beyond 2022. This may hurt few sectors such as auto sector.
Way forward
Centre need to resolve this impasse in a way that future GST reforms do not fall victim to the trust deficit engendered by this standoff, the pandemic response is strengthened and all-round government capital spending to bolster sagging demand not derailed.
GST – Grand Bargain 2.0
Source– The Hindu
Context– A Grand Bargain 2.0 between the center and the states is needed in longer run to tackle the issues related to GST compensation to the States.
Value added tax [VAT] – An indirect value added tax which was introduced into Indian taxation system on April 1, 2005. VAT was introduced to make India a single integrated market. On June 2, 2014, VAT was implemented in all states and union territories of India, except Andaman and Nicobar Islands and Lakshadweep Islands.
Disadvantages of VAT
- Cascading effect of taxes – Cascading effect is when there is tax on tax levied on a product at every step of the sale. The tax is levied on a value which includes tax paid by the previous buyer, thus, making the end consumer pay “tax on already paid tax.”
- It was not possible to claim Input Tax Credit (ITC) on service under VAT.
- Different VAT rates and laws in different states.
The need for one country one tax was envisaged by GST which is a single comprehensive destination-based tax.
GST [Compensation to States] Act, 2017
- States are guaranteed the compensation for loss of revenue on account of implementation of GST for a transition period of five years (2017-22).
- The compensation is calculated based on the difference between the states’ current GST revenue and the protected revenue after estimating an annualized 14% growth rate from the base year of 2015-16.
Issues raised by States in current GST model
- Limited option for States to raise money -States does not have recourse to multiple options that the Centre has, such as issue of a sovereign bond in dollars or rupees.
- Rate of market borrowing -Centre can anyway command much lower rates of borrowing from the markets as compared to the States.
- Rate of public sector borrowing-In terms of aggregate public sector borrowing, it does not matter for the debt markets, or the rating agencies, whether it is the States or the Centre that is increasing their indebtedness.
- Fiscal Stimulus– Fighting this recession through increased fiscal stimulus is basically the job of macroeconomic stabilization, which is the Centre’s domain thus states can’t overcome the impact of fall in revenue which is more or less lockdown induced.
- Trust issue -Breaking this important promise, using the alibi of the COVID-19 pandemic causes a serious dent in the trust built up between the Centre and States.
Possible solutions
- Low GST rate -A low moderate single rate of 12% encourages better compliance, reduces the need to do arbitrary classification and discretion, reduces litigation and will lead to buoyancy in collection.
Example- Australia, for the past two decades their GST rate has been constant at 10%.
- Importance of 3rd tier government -Of the 12% GST, 2% must be earmarked exclusively for the urban and rural local bodies, which ensures some basic revenue autonomy to them. The actual distribution across panchayats, districts and cities would be given by respective State Finance Commissions.
- Low transaction cost – The current system is too complex and burdensome. An overhaul of the interstate GST and the administration of the e-way bill to reduce the transection cost and also need to zero rate exports.
Way forward
GST is a crucial and long-term structural reform which can address the fiscal needs of the future, strike the right and desired balance to achieve co-operative federalism and also lead to enhanced economic growth. The current design and implementation has failed to deliver on that promise. A new grand bargain is needed.
Monetary Policy
Factors affecting present inflation level in India
Synopsis: The recent January 2021 retail inflation data provides relief to monetary authorities. Consumer Price Index (CPI) stood at 4.06% which is a desired outcome for ensuring macroeconomic stability.
Background:
- The inflation had remained above the RBI’s threshold mark of 6% for six months till November. The ideal range of CPI is 2-6%.
- In January 2021, inflation reached a 16-month low.
- The fall in the inflation rate was particularly attributed to a modest rise of 1.89% in Consumer Food Price Index. This was majorly a result of 15.48% drop in vegetable prices and easing of cereal prices.
RBI’s view over inflation:
- As per RBI, bumper Kharif crops, good vegetable supply in winters, and better prospects of rabi produce could reduce inflation in future months.
- Further, rising fears of avian flu will decrease poultry demand and control inflation.
- However, RBI is cautious of higher inflation in pulses and edible oils. A 13.4% price rise was seen in pulses and products. Further, the rise in the oils and fats category was 19.7%.
Future concerns which may cause inflation to rise:
- First, inflation for eggs and meat was in double digits despite the avian flu threat.
- Second, the favorable base effect is about to decrease. It is causing fear of rising inflation in the future. The base effect is the fluctuation in a monthly inflation figure due to law or high base i.e. level of inflation in the same month a year-ago.
- Third, the producers in multiple sectors (automobile, real estate, etc.) are expected to transfer the cost of inputs to consumers. This is due to rising input costs as shown by IHS Markit India Manufacturing Purchasing Managers’ Index (PMI).
- Fourth, the rising fuel prices could also contribute to increasing inflation. Diesel has already crossed the 80 rupees mark which has pushed prices of numerous goods.
In the current scenario, banks are given necessary support which has enhanced their liquidity. This calls for due vigilance by policymakers, else inflation can’t be moderated thereby impacting macroeconomic stability.
Why prices of Petrol and Diesel are rising?
Synopsis: Retail prices of petrol and diesel have reached record highs in India. One major reason is a heavy tax on Petrol and diesel in India.
Introduction
The price of petrol is touching Rs 89 per litre in Delhi and diesel reaching Rs 86.30 per litre in Mumbai. The government states that the reason behind this rise in price is an increase in global crude prices by more than 50 per cent.
While retail prices of both fuels in other countries are just reaching pre-pandemic levels, Indian consumers are paying a lot more.
Why are consumers in India paying more for petrol and diesel?
Retail petrol and diesel prices are linked to global crude oil prices in theory. That means if crude prices fall, retails prices should come down too, and vice versa. However, this does not happen in reality especially in India.
- First, when global prices go up, the consumer has to pay the increase in price. But when the prices decrease, the government introduces fresh taxes to ensure that it collects extra revenues.
- For instance, the government hiked the central excise duty on petrol and diesel at the beginning of 2020 to boost revenues. The government did this to boost economic activity government. This resulted in the revenue gain to the government.
- Currently, state and central taxes amount to around 180 per cent of the base price of petrol and 141 per cent of the base price of diesel in Delhi.
- Second, crude oil prices collapsed during the pandemic. But as economies have reduced travel restrictions, global demand has improved, and prices have been recovering.
- Third, the controlled production of crude amid rising demand has been another key factor in boosting oil prices.
- Fourth, Oil Marketing Companies (OMCs) are free to set prices for petrol and diesel based on international prices on paper. Increase in central levies has meant that the consumer hasn’t benefited from low international prices and has ended up bearing the cost of rising crude oil prices.
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Conclusion
- Experts suggest that the impact of rising fuel inflation has been balanced by declining food inflation. However, the consumers with greater expenditure on travel are bearing the higher prices even though the overall inflation reduced down to 4.06 per cent in January.
RBI’s expansionary policy and challenge of the impossible trinity
Synopsis: RBI need to exit out of its expansionary policy and manage ‘the impossible trinity’, i.e. Capital inflow, inflation and exchange rate.
Source: The Hindu
Introduction
- RBI adopted the extraordinary expansionary policy after Covid-19.
- It reduced policy interest rates aggressively to increase the liquidity in the market. It also provided targeted assistance to especially distressed sectors.
- But, now RBI should consider an exit plan out of expansionary policy to avoid any loss in the macroeconomic terms.
- In this process RBI might face the challenge of managing ‘the impossible trinity’, i.e. Keeping doors open for capital flows while simultaneously maintaining a stable exchange rate and restraining inflation.
What are the challenges in managing ‘the impossible trinity’?
Firstly, RBI need might face a dilemma of managing Inflation and support to economic recovery.
- Inflation is above the RBI’s target band for the past several months and is expected to remain above target for the next several months.
- Whereas, MPC is not able to decide against the expansionary monetary policy, out of concerns for growth and financial stability.
- MPC expects inflation to soften by itself due to bumper winter crop and normalisation of supply chain post-lockdown.
Second, RBI needs to think about the savers, offered low-interest rates at a time of high inflation. Thus, the value of their saving is getting reduced.
Third, RBI require to withdraw the ‘excess’ liquidity from the market.
- Banks are routinely depositing trillions of rupees with the RBI is evidence that the liquidity increase by RBI is not giving the intended results.
- Mispricing of risk of too much liquidity for too long can lead to the financial crisis.
Fourth, RBI might face the challenge of ‘taper tantrums’ at the later stage, which triggers the panic sell-off by the investors in the market.
- Taper tantrum: In May 2013, U.S. Federal Reserve Chairmen announced that they were considering gradually tapering/reducing ‘quantitative easing’.
- Although the announcement should have been taken as signs of a robust recovery in the economy, instead panic sell-off started in the financial market.
- Thus, RBI also need to frame their communication strategy in a way that it doesn’t trigger the panic sell-off.
Fifth, RBI will have to stop the rupee from appreciating, in the face of policy change.
- Current Account Surplus this year together with massive capital flows has caused increase in flow of dollar in the system.
- It is putting the upward pressure on the Rupee, which is already overvalued in the real terms.
- RBI has already absorbed this year, nearly $90 billion to prevent exchange rate appreciation and to maintain the competitiveness of the rupee.
- Thus, RBI’s ability to keep the Rupee value in control will be constrained by increasing inflation.
In the upcoming days, managing the impossible trinity will be a tricky challenge for RBI given the condition of the economy after COVID-19.
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India’s retail inflation
Context- Retail inflation showed signs of easing in November, led by easing prices of some food items.
More in news-
Consumer Price Index inflation stood at 6.93% in November 2020 compared to 7.61% in October, according to data released by the Ministry of Statistics and Program Implementation, though it remained above the comfort level of the Reserve Bank.
What are the reasons for decline in CPI inflation?
- The movement in retail inflation is broadly driven by the movement in food and beverage inflation which has 46 per cent weight in the consumer price index.
- Within the food items, the inflation declined for vegetables to 15.63%, cereals and products 2.32%, meat and fish 16.67% and milk and products 4.98%.
- Inflation in the key transport and communication category that includes petrol and diesel eased by a marginal 10 basis points to 11.06%.
- The inflation for housing eased to 3.19%, while that for miscellaneous items was flat at 6.94% in November 2020.
- Within the miscellaneous items, personal care and effects 11.97%, recreation and amusement 4.57%.
What are the areas of concern for RBI?
- Inflation remained above the comfort level of the RBI-
- Out of the food basket of 12 items, inflation still remained in the double digits in the case of six.
- Key protein sources including pulses, eggs and meat and fish continued to register worryingly high levels of inflation.
- Worrying high transportation cost– With oil marketing companies continuing to raise pump prices of these crucial transportation fuels, it is hard to foresee any further appreciable softening in food prices in December.
- This put the RBI’s forecast for average fiscal third-quarter inflation of 6.8% in jeopardy.
Disrupted supply chain logistics, higher operational and labour costs, higher administrative fuel costs partly contribute to the upward inflation trajectory in recent months.
What is the way forward?
- Policymakers must guard against easing vigilance on prices while considering growth-supportive measures.
- Price stability must remain the monetary authority’s primary target.
- The decline in the CPI inflation print in Nov 2020 to 6.93 per cent from 7.61 per cent in Oct 2020 has definitely come as a relief to the bond markets.
RBI allows RRBs to access LAF, MSF windows
Source: Click here
News: Reserve Bank of India(RBI) has allowed regional rural banks (RRBs) to access the liquidity adjustment facility(LAF), marginal standing facility(MSF) and call or notice money markets with the aim to facilitate better liquidity management for these lenders.
Facts:
- Liquidity Adjustment Facility(LAF): It is a facility extended by the Reserve Bank of India to the banks to avail liquidity in case of requirement or park excess funds with the RBI in case of excess liquidity on an overnight basis against the collateral of Government securities including State Government securities.
- Marginal standing facility(MSF): It is a window for banks to borrow from the Reserve Bank of India in an emergency situation when interbank liquidity dries up completely.MSF rate is generally higher than Repo rate.
- Call or Notice Market: The call/notice money market forms an important segment of the Indian Money Market.Under call money market, funds are transacted on an overnight basis and under notice money market funds are transacted for a period between 2 days and 14 days.
Additional Facts:
- Regional Rural Banks: These are financial institutions which ensure adequate credit for agriculture and other rural sectors.They were set up on the basis of the recommendations of the Narasimham Working Group (1975), and after the legislation of the Regional Rural Banks Act, 1976.
- First RRB: The first Regional Rural Bank “Prathama Grameen Bank” was set up on 2nd October, 1975.
- Stakeholders: The equity of a regional rural bank is held by the Central Government, concerned State Government and the Sponsor Bank in the proportion of 50:15:35.
- PSL: The RRBs are required to provide 75% of their total credit as priority sector lending(PSL).
Highlights of MPC meeting
Context- RBI in its 6th bi-monthly MPC meeting voted unanimously to maintain status quo on benchmark interest rates to support the economy.
What were the key highlights of latest MPC meeting?
The Monetary Policy Committee (MPC) recently left benchmark interest rates unchanged and maintained an ‘accommodative’ policy stance as it prioritized support for the economy’s recovery over ‘sticky’ inflation amid the COVID-19 pandemic.
- The RBI keeping rates low despite high inflation shows its focus to boost economic growth over keeping inflation under check which is majorly a supply-side issue.
Key highlights-
- Decision – The MPC kept the RBI’s key lending rate, the repo rate, steady at 4%.
- MPC panel projected that the real GDP contraction will contract at 7.5% [-7.5%] for the financial year ending. It is an upgrade in comparison to -9.5% in October MPC review.
- Citing the improvement in activity in the second quarter, it projected GDP would return to growth of 0.1% in Q3, and expand 0.7% in Q4.
- The RBI also announced a raft of liquidity management measures and steps to improve regulatory oversight of the financial system.
- MPC expects inflation to rise in the near term.
What are the key challenges?
- Cost push pressure– The increase in the prices of iron ore, steel and transportation fuels also add to the worries that cost pressures are continuing to accumulate.
- Food inflation surges to double in October 2020 across protein-rich items including pulses, edible oils, vegetables and spices on multiple supply shocks.
- Booming financial markets and rising asset prices because of surplus liquidity will also contribute to upside risks.
Way forward-
- MPC’s policy approach is clearly fraught with risks. A small window is available for proactive supply management strategies to break the inflation spiral being fuelled by supply chain disruptions, excessive margins and indirect taxes
- The RBI policy is supportive of growth and in sync with the government’s reform agenda.
RBI monetary policy Explained: Why have rates been kept unchanged yet again?
Source: Click here
News: Reserve Bank of India’s(RBI) Monetary Policy Committee(MPC) has announced its bi-monthly monetary policy review for the month of December.
Facts:
Key Takeaways:
- Repo Rate: It is the rate at which the RBI lends money to the banks for a short term.It remains unchanged at 4%.
- Reverse Repo Rate: It is the short term borrowing rate at which RBI borrows money from banks.It remains unchanged at 3.35%
- Marginal Standing facility: It is a window for banks to borrow from the Reserve Bank of India in an emergency situation when interbank liquidity dries up completely.It has remained unchanged at 4.25%.
- Inflation: Inflation has remained consistently above the upper end of RBI’s mandated 2-6% target range every month barring March,2020.
- Growth Projection: RBI has revised its GDP growth expectation for 2020-21 to -7.5% from -9.5% which signals improvement.
- Accommodative Stance: RBI has maintained an accommodative stance implying more rate cuts in the future if need arises to support the economy hit by the COVID-19 pandemic while ensuring inflation remains within the target.
- Tighter Norms for UCBs and NBFCs: RBI has announced the introduction of risk-based internal audit norms for large urban cooperative banks(UCBs) and non-banking financial companies (NBFCs) as part of measures aimed at improving governance and assurance functions at supervised entities.
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Additional Facts:
- Monetary Policy Committee(MPC): It is a statutory committee of the Reserve Bank of India which consists of six members with three nominated by the Union government and three representing the RBI.It is mandated by law to ensure that retail inflation stays within a band of two percentage points of the target inflation rate of 4%.
RBI sets up Reserve Bank Innovation Hub(RBIH)
Source: Click here
News: Reserve Bank of India(RBI) has announced the setting up of an Innovation Hub under the chairmanship of Kris Gopalakrishnan.It has also selected two entities for testing products under regulatory sandbox structure.
Facts:
- Aim: To create an ecosystem that would focus on promoting access to financial services and products and will also promote financial inclusion.
- Features:
- The Hub will collaborate with financial sector institutions, technology industry and academic institutions and coordinate efforts for exchange of ideas and development of prototypes related to financial innovations.
- It would also develop internal infrastructure to promote fintech research and facilitate engagement with innovators and start-ups.
Additional Facts:
- Regulatory Sandbox: It is an infrastructure that helps financial technology (FinTech) players live test their products or solutions before getting the necessary regulatory approvals for a mass launch.
Effectiveness of Monetary Policy in India | Nov. 11th, 2020
What is Monetary Policy?
- Monetary policy is the process by which the RBI controls the supply of money, often targeting an inflation rate or interest rate to ensure price stability.
- Quantitative Instruments: General or indirect (Cash Reserve Ratio, Statutory Liquidity Ratio, Open Market Operations, Bank Rate, Repo Rate, Reverse Repo Rate, Marginal standing facility and Liquidity Adjustment Facility (LAF))
- Qualitative Instruments: Selective or direct (change in the margin money, direct action, moral suasion).
Recent trends: RBI a few ago released its monetary policy report (MPR)
- The repo rate (the rate at which the RBI lends short-term funds to commercial banks) stands at 4.0 percent and the reverse repo rate (the rate at which the RBI borrows) stood at 3.35 percent.
- As per RBI, transmission to bank lending rates has improved as evident from the decline in the lending rate of banks on fresh loans.
- Rise in food Inflation owing to floods in eastern India, lockdown-related disruptions and cost-push pressure, etc.
- Global financial market volatility caused by the impact of the COVID-19 is most likely to exert pressure on the Indian rupee.
- Real Gross Domestic growth will remain negative for the whole 2020-21 period.
Monetary Policy Committee: The idea of MPC was mooted by Urjit Patel Committee. Objective:
Composition:
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- Informal Indian economy: The monetary policy affects only around 60% of loans/credit in the Indian economy which are sourced from formal channels (Banks and NBFCs).Challenges to Monetary policy functions of RBI:
- Supply chain disruptions: The MPC uses CPI inflation to adjusts its policy rates. However, the CPI doesn’t factor the rise in inflation driven by supply-chain dislocations. For example, restriction on movement resulted into a shortage of essentials.
- Weak policy transmission: Both the government and the RBI are concerned that the cumulative easing has not yet been reflected in the lowering of their lending rates by banks.
- Limitation of Inflation targeting: Inflation has been accompanied by declining borrowing in the formal sector likely affecting investment leading to rise in unemployment (according to NSSO, unemployment in India has been highest in the last 45 years).
- Triangular balance-sheet: In the aftermath of the IL&FS default in 2018, an additional dimension of liquidity and solvency of the NBFC sector has been added to the prevailing twin balance-sheet problem. Borrowing easy money cannot solve governance issues.
- Gold economy: The Indian household saves in gold/jewelry rather than financial instruments. This curtails RBI from effectively circulating money in the economy.
Is Inflation targeting a good policy?
Inflation targeting:
- It is a monetary policy strategy used by central banks to maintain inflation within a specific range.
- Narasimham (2000) and Rajan (2007) Committees recommended the implementation of inflation targeting in India.
Inflation targeting as a good policy
- It increases the transparency and credibility of the central bank consequently allowing it to carry out its monetary policy more effectively.
- It helps to stabilize inflationary expectations in an uncertain future.
- Increases the focus on domestic considerations and enables quick response to domestic economy shocks.
Limitations of Inflation targeting policy
- The policy doesn’t address the sudden shocks in the economy and inefficient transmission mechanisms.
- Too much weight to inflation stabilization might prove detrimental to the stability of real economy and other growth objectives.
- Requirement of Number of preconditions like well-developed technical infrastructure for forecasting, modelling and data availability etc.
- India lacks suitable conditions for successful implementation of inflation targeting. For example, lack of adequately developed financial markets, confidence of global capital markets is low, independence of the RBI etc.
- Policy of inflation targeting will lead to highly unstable and inappropriate exchange rate.
Need for independent MPC:
- To form credible governance policy: RBI should be independent to decide on the precise corrective action for banks with high NPAs, the desirable state of liquidity and the prudential norms to be observed by banks.
- To ensure low and stable inflation: For instance, Governments use pro populist policy before elections to provide a short-term boost to growth. This often leads to long-term inflation.
- Sustain Credit availability: To ensure adequate flow of money and credit to required areas.
- To prevent sudden appreciation and depreciation of currency. For example, In Turkey lira had depreciated over 80% against the dollar in the 12 months due to government interference.
- Sustainable Investments: Independent MPC will boost the investors’ confidence and will enhance credit ratings there by attracting more investments.
- To avert crisis: Mismanagement between fiscal and monetary policy led to increased Sovereign debt in developing economies. For Example, Greek Crisis.
Way forward:
- Develop a legal process to ascertain RBI’s responsibilities and accountability.
- Ensuring RBI’s autonomy: The governor should be made responsible and accountable to Parliament. The RBI act should be amended to provide a guaranteed tenure of the governor and deputy governors for their effective functioning.
- Change in policy: There is need to look at an indicator of inflation that excludes food and fuel and include structural factors responsible for price rise.
- Cooperation between Government and RBI: There should be mutual cooperation and coordination between RBI and Government in large at public interests for an efficient and sustainable economy.
Reserve Bank of India (RBI) governance
Context– RBI has to answer to Parliament why it misses the inflation target and what plans do they have to control inflation.
What is Inflation targeting and what happen when RBI fails to meet inflation target?
- Inflation targeting involves using monetary policy to keep inflation close to the agreed target. RBI and Government of India signed a Monetary Policy Framework Agreement in February 2015.
- As per terms of the agreement, the objective of monetary policy framework would be primarily to maintain price stability (inflation targeting), while keeping in mind the objective of growth.
- Target given to MPC:The Reserve Bank of India’s (RBI) MPC was given the target of keeping inflation at 4% +/- 2%. This meant that inflation should be between 2% and 6%.
- Condition for failure of inflation target – A breach of the tolerance level for three consecutive quarters will constitute a failure of monetary policy.
- In such case– RBI have to send a report to the central government stating reasons and the remedial actions it proposes to initiate, and an estimate of the time-period within which it expects to achieve the inflation target through the corrective steps proposed.
- Aim– To enhance transparency and accountability of the central bank.
What was the reason proposed by RBI for the breach of inflation target?
- Lack of Data due to lockdown– The MPC is of the view that there was a break in the consumer price index (CPI) series since inflation data for April and May was imputed and not collected by visiting the markets by NSO surveyors. It was rather estimated by the NSO.
However, Prices could be collected from the urban markets and villages after lockdown restriction were lifted and non-essential activities partially restored.
Way forward-
- The central bank needs to answer three questions — why it has failed to achieve its target; what remedial measures it would take to bring inflation back within the target range; and by what time.
- Transparency can enable more informed decision-making within the government, greater public scrutiny of the RBI’s performance, and an improved inflation-targeting regime.
Base year of CPI-IW changed
The Labour and Employment Ministry on Thursday revised the base year of the Consumer Price Index for Industrial Workers (CPI-IW) from 2001 to 2016.
Why the base year for the Consumer Price Index for Industrial Workers(CPI-IW) has been changed?
Due to the changing consumption pattern, more weightage has been given to spending on health, education, recreation and other miscellaneous expenses while the weight of food and beverages has been reduced.
Consumer Price Index (CPI) for Industrial Workers
It measures changes in the price level of a market basket of consumer goods and services purchased by households.
CPI data is released monthly by the Central Statistics Office (CSO) which functions under the Ministry of Statistics and Programme Implementation.
There are four types of CPI: a) CPI-IW (Industrial Worker), b) CPI-UNME (Urban Non-Manual Employees), c) CPI-AL (Agricultural Labourers) and d) CPI-RL (Rural Labourers)
RBI has adopted CPI as the key measure for determining the inflation situation of the Indian economy on the recommendation of the Urjit Patel Committee.
Usage of CPI-IW
CPI-IW is used:
- To regulate the dearness allowance (DA) of government staff and industrial workers.
- Apart from measuring inflation in retail prices.
- To revise minimum wages in scheduled employments.
After this Index, the government is expected to announce a new series of the CPI for agriculture workers, which is currently using the base year of 1986-87.
Need for Base years
Base years are required to facilitate inter-year comparisons of various data. if an index is using 2011-12 as the base year, data of all future years will be calculated based on the data of the index in 2011-12, for the purpose of comparison.
Example: Let’s say the cost of a basket of goods in an index was Rs 6 lakh in the base year (2016), and has been set to an index value of 100. If in 2017, the basket cost has been increased to Rs 6.6 lakh, the index equivalent would be 110.
The inflation rate will be computed by comparing 110 which is today’s value to the base value which is 100, resulting in a 10% increase.
Base years are used to nullify the impact of inflation on the data and project the actual estimates.
Thus, for selecting a year as the base year, certain requirements should be fulfilled, such as:
- The year must be a normal year and not have experienced any abnormal incidents such as earthquakes, droughts, floods, etc.
- No abnormal economic activity like Hyper rise in price should have taken place.
- Base year should not be very far from the current year.
India’s inflation targeting policy (Monetary policy)
Source – Live Mint
Syllabus- GS-3 Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment.
Context- Inflation targeting and the decisions of Monetary Policy Committee (MPC).
What causes inflation?
The primary cause of inflation is the mismatch between demand and supply. The mismatch can be in following context-
- Excess money supply that raises aggregate demand
- Supply deficiency (A shortfall in the production of a commodity fails to meet even the basic needs of the citizens and thus prices raise causing inflation).
What is the new monetary framework?
The agreement between the Reserve Bank of India (RBI) and the central government signed in February 2015. The agreement explicitly made inflation targeting the objective of the MPC while using the repo rate as the instrument for it.
- Rate steady– The Reserve Bank’s MPC was given the target of keeping inflation at 4% with a tolerance limit of 2%. This meant that inflation should be between 2% and 6%.
- Contrasting target – The target was in contrast with the multiple indicator approach that predated this framework where the central bank focused on both growth and price stability.
Thus, RBI was finally free to do its core job as guardian of the rupee’s value and granting currency the stability needed to serve as a credible unit for long-range forecasts.
What is inflation targeting? What are the views of critics?
Inflation targeting refers to keeping inflation rate within the permissible band so that business houses can plan their investment activities.
Procedure-
- Review meeting– (every two months): Where MPC discuss the likely inflation and growth estimates over the coming months.
- Targeting inflation: Based on this review, the MPC targets inflation using the policy rate, or the repo rate.
Critics’ view-
- Inflation targeting was ill-suited to an emerging economy like India.
- Flexible regime with a wide inflation band was far too rigid to foster growth.
Inflation in India has been subdued since the new monetary policy framework was brought in. Many view this as a sign of its success in India while others point at the tight policy and its adverse impact on India’s growth rate as a sign of problems with the framework, which has come at the cost of growth.
Way forward
Centre must not act in haste to abandon inflation targeting. Price stability is a goal too worthy to give up on. For the sake of fairness, if not the rupee, government should resist the temptation to use the “money illusion” of inflation for short-term ends.
Demand to Rework Inflation Targeting Regime
Source: Indian Express
Gs3: Indian Economy and issues relating to Planning, Mobilization of Resources, Growth, Development and Employment.
Context: Recently the monetary policy committee (MPC) concluded that elevated inflation has constrained it from easing policy rates.
Why there is demand to rework inflation targeting regime?
- Economy slowdown:Since the growth rate is falling that is why question have been raised regarding the inflation targeting framework.
- Growth-inflation quagmire:there is demand for the government to relax the inflation targeting framework to spur growth and demand.
Suggestions:
- Greater tolerance for higher levels of inflation either by adjusting the acceptable range of inflation upwards, or by extending the period over which the MPC has to meet its inflation target.
- Shift from headline to core-inflation as the nominal anchor of monetary policy.
- Incorporate other indicators such as nominal GDP explicitly into the framework.
- Doing away with the inflation targeting framework altogether.
What are possible way outs and their implications?
Easing policy rate:
- It will inject a degree of uncertainty and unpredictability in monetary policy.
- Frequent revisions will destabilise household expectations.
- It will signal a lack of commitment to maintaining price stability.
Shift to a multiple indicator structure:
- This move harks back to the pre-MPC days when there was far greater uncertainty over monetary policy.
- No clarity over the indicator that was dictating the stance of the RBI governor.
- Absence of a well-defined anchor will reduce transparency and accountability from the central bank.
Central bank financing the Centre’s capital expenditure on a regular basis.
- Monetisation should be the last resort: The perils of falling back on this long-discarded policy need to be guarded against.
- Tilt the balance of power in favour of the government: Government owing to its short-term political imperatives will be seduced by the apparent simplicity of this idea without considering its long-term repercussions.
- Channel funds to revenue expenditure:It will lead to a situation wherein the entire budgeted capital expenditure is financed by the central bank.
- Blur the line between fiscal and monetary policy :Giving a central bank a degree of control over the government’s expenditure priorities will allow unelected technocrats to be in charge of determining the expenditure priorities of the government. It will result in the fiscalisation of monetary policy.
Pledge Government shares in companies to avail loans against them:
- It raises questions whether a sovereign should pledge assets to borrow in the local currency.
- In 1991, India had pledged gold for a foreign currency denominated loan not a local currency loan.
- There is not clarity on what will happen if the value of the shares pledged falls below that of the loan.
What is the way forward?
- There is need topush for more external voices in the MPC. For instance, In the UK, a non-voting treasury representative sits with the MPC to discuss policy issues.
- During periods of extreme uncertainty, there is need to adopt some unconventional measures but the principles of sound public policyshould not be discarded.
National Income, GDP
Impacts and importance of GDP revised estimates
Source – The Indian Express
Syllabus – GS 3 – Indian Economy and issues relating to planning, mobilization, of resources, growth, development, and employment.
Synopsis – Revised estimates of GDP are released. It would impact the growth prediction and levels of the future National Income.
Introduction
- Last week all major financial publications were released i.e. economic survey, budget, and 1st bi-monthly monetary policy review.
- However, the first revised estimate of GDP growth in 2019-20 was not highlighted.
- This revision has not only revised the 2019-20 GDP growth rate, but also the GDP growth rate for 2017-18 and 2018-19.
- Accordingly, GDP estimates for 2019-20 have been revised from 4.2% to 4 percent. For 2017-18 revision is from 7% to 6.8% and for 2018-19 it is from 6.1% to 6.5%.
What are the key takeaways from GDP revision?
- First, There have been many revisions of GDP estimates. The growth rate is still not certain. For example, for 2016-17 the GDP growth rate went up from 7.1%, as per the First Advance Estimates, to 8.3% in the final analysis.
- Second, revision in 2019-20 figures is important for the base year effect. Due to COVID-19 disruptions in 2020-21, the GDP figures of 2019-20 becomes important for the comparison. Lower estimates in 2019-20, can result in higher figures of 2020-21 and 2021-22.
- Third, India’s GDP growth rate already going downwards from 2016 i.e. following an inverted-V shape. The COVID-19 pandemic brought that to a complete halt. Thus, a “V-shaped” recovery, which is being talked about by the expert is meaningless. For an actual recovery, the gains should first surpass the level of 2019-20.
Way forward-
The pandemic did not change the growth trajectory [it was already going down], it only made the decline even more precipitous.
Focus areas of Economic Survey 2020-21
Source- The Indian Express
Syllabus- GS 3 – Indian Economy and issues relating to planning, mobilization, of resources, growth, development, and employment.
Synopsis – The Economic Survey 2020-21 outlines the status of various sectors of the economy.
Introduction-
- The government presented Economic survey 2020-21 of India in the Parliament.
- The Economic survey provides a summary of the annual economic development across the country during the previous financial year.
- The focus of this year’s economic survey is on the following basic tenets:
- Atmanirbhar Bharat in COVID times.
- Shifting from entitlement-based approaches to an entrepreneurship-based policy framework.
- Going beyond “nudging”.
Nudging is a method of changing people’s behavior by incentives and encouragement. It does not favour the use of force or penal actions for inducing behaviour change among people. It was used to discourage open defecation by communicating its advantages and financial incentives for toilet construction.
Key highlights of Economic Survey 2020-21
The Economic Survey 2020-21 examined the correlation of inequality and per-capita income with a range of socio-economic indicators, including health, education, etc.
- Economic recovery: The emphasis is mostly on the economic recovery routes after the damage due to COVID-19 pandemic. It is expected that the recovery will follow a V-shaped path. Now, the target of making India a $5-trillion economy by 2024 is also clear.
- Health expenditure: The survey recommends raising government spending on the healthcare sector [from the current 1 per cent to 2.5-3 per cent of GDP]. It will reduce out-of-pocket expenditures.
- Health outcomes- The health results of the states that have adopted Pradhan Mantri Jan Arogya Yojana (PM-JAY) have improved compared to those that have not adopted the scheme.
- Bare necessities- Access to the bare necessities such as water and sanitation, accommodation, micro-environment, and other facilities has improved across all States. The survey looks at how the bare necessities have changed.
- National Infrastructure Pipeline (NIP) will boost inclusive economic growth and employment opportunities during 2020-25. The NIP [introduced in 2020] has estimated cumulative investment of 111 lakh crore over five years in infrastructure projects.
- Government consumption and net exports cushioned the growth from diving further down.
- Strong services exports and weak demand leading to a sharper contraction in imports than exports.
- India remained a preferred investment destination in FY 2020-21 with FDI pouring.
- India’s forex reserves at an all-time high as to cover 18 months’ worth of imports in December 2020.
However, the survey should have focused more on the external trade aspect. India should try to establish value chains with South and Southeast Asia.
India should also reconsider the high cost of tariffs when 38% of our exports rely on imports.
Reviving consumption demand for economic growth
Synopsis- Expenditure side of National Income is showing signs of stress. The government should try to revive the consumption side to return to the growth path.
Introduction
- The first advance estimates of GDP growth for FY21 is more optimistic than the projections provided by many institutions, global and domestic.
- However, the figures still have a substantial chance of uncertainty as the source of data is not reliable [Very little up-to-date primary information is available for the estimation].
What are the areas of concern?
On the expenditure side, except for government final consumption expenditure, alternative drivers of demand are down sharply. Non-Public Consumption Expenditure is predicted to contract 9.5 per cent while capital formation has contracted by 14.5 per cent, with imports and exports also contracting.
The economic performance was dented by sharp de-growth in the following three sectors-
- A sector-wise breakup of data for FY21 shows the sharpest fall in trade, hotels, transport, communication, and broadcasting services at –21.4 per cent from 3.6 per cent growth last year.
- This is followed by 12.6 per cent contraction within the construction sector as against a growth of 1.3 per cent last year.
- Manufacturing is declining by 9.4 per cent in 2020-21 from 0.03 per cent growth last year.
The estimated losses in these three sectors account for 93.5 percent of the total loss for the whole year. Hence, fiscal policy needs to focus on priming demand to return to the trend growth path.
What policy interventions are needed to increase consumption?
- First, Government should focus on enhancing credit flows to the small and marginal farmers
- KCC (Kisan Credit Cards) constitute 60% of Major outstanding bank credit due to COVID and Agri stress.
- To encourage consumption among farmers, interest payment by farmers should be sufficient for their KCC loan renewal.
- It may result in a reduction of the NPA of the banks from KCC.
- Second, the government should try to mainstream the tenant farmers
- There are almost 3-4 crore tenant farmers, not receiving PM-KISAN benefits.
- The government should try to formalize the credit delivery to tenant farmers by issuing tenancy certificates on the line of Andhra Pradesh.
- Another way is the formation of SHGs to enable formal lending.
- Third, waive tax on Senior citizen saving scheme– The government should make SCSS interest income to be tax-free.
- Fourth, Launch Adopt-a-family scheme– The scheme is voluntary and taxpayers with income up to over Rs 10 lakh could be incentivized for supporting a BPL family for a year. The government can incentivize taxpayers with around Rs 50,000 tax deduction apart from exemption offered under-80C.
- Fifth, take the following steps to bring more FDI and increase Ease of Doing Business rankings;
- Withdraw all tax appeals.
- Accept all domestic arbitration decisions against government departments/agencies
- Clear above outstanding dues within a stipulated time.
- Sixth, the Government should increase investment in the health and education sectors;
- The government can introduce a medical savings account.
- Interest earned by the depositor can be deducted by government to provide the person with Mediclaim policy.
- Lastly, the government should bring down its stake in state-owned banks to less than 50 percent.
Way forward-
By fulfilling these criteria, India can improve its position on the Ease of Doing Business ranking.
Issue of K-shaped recovery: How government budget can deal with it?
Synopsis –The macro-implication of K-shaped recovery and labour market pressure. How the government budget will deal with it?
Introduction-
- COVID Vs Economic Mobility – India has broken the link between COVID virus proliferation and mobility earlier and more successfully.
- India’s GDP estimates for 2020-21 show that the economy is expected to perform much better than earlier projections.
- However, the present economic recovery is very hopeful developments but, juxtaposed with a stronger-than-expected recovery, is confirmation of labour market scarring.
What are the present economic developments in India?
- Industrial sector - The large firms have endured the crisis better and are gaining market share at the expense of smaller firms.
- Although it will increase medium-term productivity, but it will also increase the dominance/pricing power of big companies in the market.
- Employment – CMIE’s [Centre for Monitoring Indian Economy] labour market survey reveals 18 million fewer employed (about 5 per cent of the total employed) compared to pre-pandemic levels.
- These labor market projections not incompatible with a sharper near-term rebound, as this recovery is led by capital and profits, not labour and wages
- Household sector – Households at the top of the pyramid are seen their incomes largely protected, and savings rates forced up during the lockdown, increasing ‘fuel in the tank’ to drive future consumption.
- Meanwhile, households at the bottom are likely to have witnessed permanent hits to jobs and incomes.
What are the implications of a K-shaped recovery?
K-shaped recovery happens when, following a recession, different sections of an economy recover at starkly different rates or magnitudes. The macro-implication of K-shape recovery in India are-
- Firstly, issue of Income- Upper-income households have benefitted from higher savings for two quarters. Present recovery is led by these savings.
- But lower-income households are facing loss of income in the forms of jobs and wage cuts. This will be a recurring drag on demand, if the labour market does not heal faster.
- Second, the issue of Consumption– To the extent that COVID has triggered an effective income transfer from the poor to the rich, this will be demand-hindering because the poor have a higher marginal propensity to consume (i.e. they tend to spend (instead of saving) compared to higher marginal propensity to import among rich.
- Consumption pattern– Passenger vehicle registrations (proxying upper-end consumption) have grown about 4 per cent since October while two-wheelers have contracted 15 per cent.
- Third, increases the inequality– COVID-19 reduces competition or increases the inequality of incomes and opportunities between rich and poor.
- This could affect the trend growth in developing economies by hurting productivity and tightening political economy constraints.
How upcoming budget may help India to deal with K Shape recovery?
Policy needs to look beyond the next few quarters and anticipate the state of the macroeconomy post the sugar rush, for the wellbeing of poor citizens and increase its income level.
- First, Policy will look for the private sector to start re-investing and re-hiring, and thereby sets the economy onto a more virtuous path. Barring that, the labor-market hysteresis could sustain with the manufacturing and service sectors.
- Private investment revival policy may be implemented first for recovery of the private sector.
- Second, Ensure exports should benefit from increasing global growth as the world gets vaccinated steadily.
- Third, Government may invest in large physical and social (health and education) infrastructure push. It may provide employment for who lost job due to COVID. It may reduce inequalities.
- Fourth, a reliable medium-term fiscal plan will be key to anchoring the bond market and underscoring an adherence to macro stability.
- Lastly, the investment model for public investment must be balanced to push and financed by aggressive public asset sales.
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World Bank’s Global Economic Prospects Report predicts contraction of Indian economy
News: The World Bank has released the Global Economic Prospects report.
Facts:
- Global Economic Prospects Report: It is a World Bank Group flagship report that examines global economic developments and prospects, with a special focus on emerging markets and developing economies. It is issued twice a year, in January and June.
Key Takeaways from the Report:
- India: It is expected to grow at 5.4% in fiscal year 2021-22 and 5.2% in fiscal 2022-23 after an expected contraction of 9.6% in fiscal 2020-21.
- Reason: India’s expected contraction in the is due to a sharp decline in household spending and private investment. There was severe income loss in the informal sector which accounts for 4/5ths of employment
- Globally: Global economic output is projected to grow by 4% in 2021 assuming widespread roll-out of a COVID-19 vaccine throughout the year. This projection is 5% below pre-pandemic levels.
- Emerging Market and developing economies (EMDEs): They are expected to grow at an average of 4.6% in 2021-22 reflecting the above average rebound in China (forecast at 7.9% and 5.2%, this year and next).
- Increase in Global Debt Levels: There has been a massive increase in global debt levels because of the pandemic with the South Asian region seeing the steepest increase. India’s government debt expected to increase by 17% of GDP while service output contracts over 9%.
- South Asia slowdown led by India: The South Asian region’s economy is expected to contract by 6.7 % in 2020 due to the pandemic. This was led by India’s deep recession where the economy was already weakened by the stress in non-bank financial corporations.
Recommendations:
- The key immediate policy priorities for countries should be limiting the spread of the virus, providing relief for vulnerable populations and overcoming vaccine-related challenges should be the key immediate policy priorities for countries.
- Countries should also foster resilience by safeguarding health and education, prioritising investments in digital technologies and green infrastructure, improving governance, and enhancing debt transparency.
Economic Impact of Internet shutdown in Indian and world economy
News: According to a report by the UK-based privacy and security research firm Top10VPN, India has suffered the longest internet shutdowns in 2020 globally.
Facts:
Key Takeaways from the report:
- Globally, internet shutdowns cost the world economy $4 billion. However, this represents a 50% decrease in impact compared to $8.05 billion in 2019.
- India has suffered the biggest economic impact in the world in 2020 due to Internet shutdowns adding up to 8,927 hours and $2.8 billion losses.
- Among 21 countries that curbed internet access last year, the economic impact seen in India was more than double the combined cost for the next 20 countries in the list.
- India continued to restrict Internet access more than any other country — over 75 times in 2020.The majority of these short blackouts were highly targeted, affecting groups of villages or individual city districts.
- The report made a separate mention of the extended curbs on Internet use in Jammu and Kashmir. It has called it as the longest Internet shutdown in a democracy.
GDP likely to contract by 7.7% in 2020-21, says Govt.
News: National Statistical Office(NSO), Ministry of Statistics and Programme Implementation(MoSPI) has released the First Advance Estimates (FAE) for 2020-21.
Facts:
- What are the First Advance Estimates(FAE)? For any financial year, the MoSPI provides regular estimates of GDP. The first such instance is through the FAE. The FAE for any particular financial year is typically presented on January 7th.
- Significance: FAE significance lies in the fact that they are the GDP estimates that the Union Finance Ministry uses to decide the next financial year’s Budget allocations.
- Based on: The FAE are based on the benchmark-indicator method. The sector-wise estimates are obtained by extrapolation of indicators like:
- Index of Industrial Production(IIP) of first seven months of the financial year
- Financial performance of listed companies in the private corporate sector available up to quarter ending September,2020
- First Advance Estimates of crop production
- Accounts of Central and state governments
- Information on indicators like deposits and credits, passenger and freight earnings of Railways, passengers and cargo handled by civil aviation, cargo handled at major sea ports, sales of commercial vehicles available for the first eight months of the financial year.
Key Takeaways:
- GDP: India’s real GDP (Gross Domestic Product) is estimated to contract by 7.7% in 2020-21, compared to a growth rate of 4.2% in 2019-20.India will witness a negative GDP growth rate for the first time after 1979-80.
- Reason: The reason for the contraction has been the disruption caused by Covid-induced lockdowns which saw the economy contract by almost 24% in the first quarter and by 15.7% during the first half of the year.
- Gross Value Added(GVA): It provides a picture of the economy from the supply side. It maps the value-added by different sectors of the economy such as agriculture, industry and services. The real GVA will also shrink by 7.2%.
- Positive Growth: Just two sectors are estimated to record positive growth in GVA this year with Agriculture continuing its strong run through the first half of year to the second half (3.4%) and Electricity, Gas, Water Supply & Other Utility services(2.7%).
- However, the sharpest decline in the pandemic-dented year is expected to be in the Services Sector.
- Private Final Consumption Expenditure (PFCE): The biggest demand for goods and services comes from private individuals trying to satisfy their consumption needs. This demand is called PFCE and it constitutes over 56% of the total GDP. It is expected to be almost what it was in 2017-18.
- Gross Fixed Capital Formation (GFCF): The second biggest component of GDP is called GFCF and it measures all the expenditures on goods and services that businesses and firms make as they invest in their productive capacity. This type of demand accounts for close to 28% of India’s GDP. It has fallen below the 2016-17 level.
- Government expenditure: It is expected to show a robust growth of 17% in the second half of the year, despite the challenges faced by the government on fiscal consolidation and the fact that government expenditure fell 3.9% in the first half of the year.
Current account surplus moderates to $15.5 bn in Q2
Source: The Indian Express
News: The current account surplus moderated to $15.5 billion (2.4% of GDP) in the quarter ended September of 2020-21 from $19.2 billion (3.8% of GDP) in the first quarter this fiscal.The current account saw a deficit of $7.6 billion(1.1%) in the year-ago quarter.
Facts:
- Why has current account surplus narrowed? The narrowing of the current account surplus in Q2 of FY21 was on account of a rise in the merchandise trade deficit to $14.8 billion from $10.8 billion in the preceding quarter.
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Current Account:
- What is the Current Account? Current account maintains a record of the country’s transactions with other nations, in terms of trade of goods and services, net earnings on overseas investments and net transfer of payments over a period of time, such as remittances.
- This account goes into a deficit when money sent outward exceeds that coming inward.
- What does Current account constitute? The current account constitutes net income, interest and dividends and transfers such as foreign aid, remittances, donations among others. It is measured as a percentage of GDP.
Current Account = Trade gap + Net current transfers + Net income. abroad
- Why does Current account matter? Current account balance measures the external strength or weakness of an economy.
- A current account surplus implies the country is a net lender to the rest of the world, while a deficit indicates it is a net borrower.
- A country with rising Current Account Deficit(CAD) shows that it has become uncompetitive, and investors are not willing to invest there. They may withdraw their investments.
Importance path How to increase economic recovery of India
Synopsis: Government should adopt a fiscal stimulus Path for the economic recovery of India, to make our economy grow at 9% GDP in the coming years.
Background
- The impact of the pandemic has pushed India to impose stringent lockdown measures to save millions of lives of Indian citizens but it’s after effect has caused massive economic disruption.
- This has resulted in fall of GDP by around 7.5 percent for this full year which has dented our aspiration to become a$5 trillion economy by 2024.
- Though nothing much can be done for what has happened, in the coming years India needs to get back to the trend line of growth (pre-COVID years) to sustain the aspiration of our young population.
How different sectors are performing currently?
- The sectors which have shown a positive sign of recovery are
- Pharmaceuticals and chemicals, the FMCG sector, the two-wheeler sector, Construction equipment’s driven by rural demand from sales to individuals, Capital goods.
- In contrast, Sectors that are still struggling for a full recovery are
- Mainly, the travel and tourism sector, real estate and construction sector, and retail which are significantly high employment sectors.
So, what steps must the government take?
Though the recovery underway is solid, but we need measures to sustain and deepen it. The government can do three things.
- First, the government should resort to fiscal stimulus by paying long-overdue government bills. Few examples are,
- Distribute the pending tax refunds, pay the bills of all companies (large and small), pay off the many arbitration award spending where the government has lost cases, and pay state governments their pending GST dues.
- Second, invest in public health infrastructure and centre should finance state government efforts to build an extensive public health network.
- While this will equip as to handle a possible second wave of the virus, on the other, it will spread confidence.
- Also, it is essential for the government to work in partnership with private sector hospitals.
- Third, invest massively in infrastructures such as roads, ports, logistics. Areas, where investment can be channelised, are,
- By Providing decent, accessible housing to improve the living conditions in slums across our cities by providing right public-private program.
- By providing cheap connectivity into our cities.
- Even, the 20 trillion infrastructure pipeline project that requires massive funding can be considered.
How the funds for the above will be sourced?
- To mobilize its resources that are needed to finance the above measures, the government can opt for a huge privatization programme (Disinvestment)
- Under this program, the government should intend to reduce its share-holding to 26 percent across public-sector banks, steel companies, oil companies, and every manufacturing company and hotel it currently owns.
- This announcement might trigger a big rally in the stock prices of PSUs, increasing return.
- To stem the protests due to big reforms,we are witnessing currently, the government should choose democratic methods for implementing them such as use of discussion papers for public comment, the debate in Parliament.
We need to act swiftly to regain from stunted recovery. We must use our economic crisis as an opportunity to set some bigger things right that we have ignored for too long.
Vital notes from the year 2020
Synopsis: As 2020 is coming to an end, we should ponder upon the issues the country faced this year and ensure that 2021 does not become another wasted year.
What are the issues India faced in the Vital notes year 2020?
- Pandemic: The COVID-19 pandemic had an impact on every segment of Indian society and infected approximately more than a crore of its citizens (1.5 lakh fatalities).
- Border stand-off: India is facing an unexpected border stand-off situation with China in eastern Ladakh. The tensions even led to martyrdom of Indian soldiers. This has had a serious impact on India-China relations.
- Internal Security issues: The bitterness caused by the altered status of J&K and the custody of political leaders and the Naxalite violence have resulted in serious internal problems.
- States: There lies a grave concern for violence in the upcoming elections of West Bengal.
- Economy: The economy is in recession. India has fallen down the scale in the Human Development Index and in the Global Economic Freedom Index.
- New bills on social issues, for instance:
- A law against forced conversion by marriage will intensify an already divisive society.
- The farmers’ agitation is another instance where official inflexibility has led to a situation in which the Supreme Court had to intervene.
What should India do in the upcoming year?
Series of electoral successes for the ruling party; the personal popularity of the Prime Minister; and the absence of any strong competitor on the national stage gives the current government an opportunity to bring solid changes.
- Firstly, India should come up with a new model of ideas for foreign policy which can be implemented. This would enable India to be viewed as the only nation in Asia that can stand-up to the China challenge.
- Secondly, the idea that says India should look inward rather than outwards to enlarge its economy needs to be rejected, and India should enhance its export capacity.
- Thirdly, the government should take crucial steps to resolve the troubles in the labour market caused by the pandemic and other contributory factors.
- Creating new jobs in new industries should be a critical requirement.
- Stimulating demand would ensure growth in job opportunities.
Way forward
- Effective cooperation between the Centre and the States must be restored to impart confidence about India’s democratic future.
Economic Growth
Context: It is important that, only if the Indian economy grows at 8% in 2021-22 we will be able to compensate for the decline in 2020-21.
What needs to be done to make Indian economy to grow @ 8%?
- Accommodative Monetary policy: A reduction in interest rate through changes in policy rate, providing liquidity through various measures, and regulatory changes such as moratorium.
- Fiscal initiatives: A sharp increase in government capital expenditures which can act as a stimulus for growth. To increase government spending, government revenues should pick up with the rise in GDP and the fiscal deficit must be brought down.
- Growth and investment: The investment rate has been falling. In 2018-19, the rate fell to 32.2% of GDP from 38.9% in 2011-12. A detailed investment plan of the government and public sector enterprises must be drawn up and presented as part of the coming Budget.
- Exports: Closing borders may appear to be a good short-term policy to promote growth but it kills growth all around. A strong surge in our exports will greatly facilitate growth, in 2021-22.
What is the way forward?
- Strong effort must be made to improve the investment climate. The National Infrastructure Pipeline is a good initiative, but the government must come forward to invest more on its own.
- Reforms are important but the timing, sequencing and consensus building are equally important. For example, Labour reforms, are best introduced when the economy is on the upswing.
The Indian economy in 2019 was at around $2.7 trillion. To achieve the level of $5 trillion, we need to grow continuously at 9% for six years from now.
Why Indian Economy is slowing down?
What are the issues facing Indian Economy?
- COVID pandemic has pulled down the global economy and India’s economy is one of the worst affected among them.
- In the first quarter of the financial year (April-June), India’s economy had contracted by an unprecedented 23.9%. Whereas in the second quarter, after a bit improvement, economy contracted by 7.5%, less than the anticipation.
- With the result of 2nd quarter, India has slipped into the Technical recession, which requires economy to be negative or declining for two consecutive quarters or more.
- Although some economist argue that when growth rate is measured on quarterly basis, instead of year-on-year basis, India’s GDP plunged 25 per cent in 2Q20 and recovered by 21 per cent in 3Q20. Thus, India’s economy is not in the technical recession.
Before we move any further in this article to understand the causes behind slowing Indian Economy, first we need to understand the components of the GDP.
How to calculate GDP using Expenditure method?
Final goods and services produced in a country during a period of time are taken into account under expenditure method of calculating National Income or Gross Domestic Product. In this method final expenditure made by each stakeholder is taken into account.
Final expenditure is that part of expenditure which is undertaken not for intermediate purposes.
Following is the formula for calculating GDP by expenditure method;
GDP = C + I + G + (X − M)
- C (Consumption) represents the consumption expenditure by the households on Final goods and services, known as Private Final Consumption Expenditure (PFCE).
PFCE is the biggest component of the GDP and constitute around 55-57% of the GDP.
2. I (Investment) represents business investment on equipment. It includes Gross Fixed Capital Formation (GFCF) and Inventory.
- GFCF includes Investment made in the long-term assets by government and private sector and investment in residential units by business or households.
- Inventory investment includes investment for procuring raw materials and finished or unfinished goods.
Investment constitute around 30-32% of the GDP.
GFCF Includes investments from Government, Businesses and households. 25% of I is constituted by government investment (Centre, states and PSUs) and 35-40% each is that by the corporate (India Inc.) and non-corporate (MSMEs and household investment in real estate) private sector.
3. G (Government) represents sum of government expenditures on final goods and services including salaries, weapons, investments, etc., also known as Government Final Consumption Expenditure (GFCE).
It doesn’t include the investment in financial products.
GFCE constitute around 10-12% of India’s GDP.
4. X represents gross exports and M represents gross imports. Balance of both is called net exports.
What are the causes behind falling GDP growth?
Demand related issues (PFCE)
- Consumer demand is falling in urban India. Sales of domestic cars and commercial vehicles are on decline even before COVID pandemic. More than 2.1 crore individuals have lost salaried jobs due to the pandemic since April, and economists estimate the number to increase in future as companies struggle to run smoothly.
- While many of those didn’t lose their jobs, saw their salaries drastically reduced.
- Wage growth rate in rural area has declined to a new low. 10 million more rural households are seeking MGNREGA employment per month since August compared to a year ago.
Effect on the GDP
- Fall in income of households is leading to drastic fall in aggregate demand for goods and services i.e. Private Final Consumption Expenditure (PFCE). PFCE remains in the negative territory, at -11.3% in Q2. Private consumption demand, is the mainstay of the economy as it contributes around 55-60% of GDP.
- Loans for households are although easily available after government stimulus package, but due to uncertainty of the future income and savings, people are apprehensive of taking loans at present.
Investment and supply related issues (GFCF)
- Growth rate in eight core sectors is sluggish. That means even if the demand is improving industries will not be in the position to meet those demands.
- As per All India Manufacturers Organization’s June survey, about one-third of small and medium-sized enterprises indicated that their businesses were beyond saving.
- Unorganised sector, which is specifically dependent upon daily cash flows and lacking organised fund sources like loans and finance from the institutions, has been badly affected. This sector was already badly affected by demonetisation and GST, COVID pandemic has reduced the possibility of revival of many firms working in this sector.
Impact on the GDP
- Gross Fixed Capital Formation (as % of GDP) had been on a constant decline (except in 2018) between 2014 and 2019, falling from 30.1% to 27.4%. In Financial year of 2020-21, GFCF was contracted by 7.3% in Q2, compared to 47.1% in Q1.
Government expenditure related issues (GFCE)
- The central government’s total expenditure (both revenue and capital) has been declining sharply since 2010-11. From a high of 15.4% of the GDP in 2010-11, the total expenditure has hit a low of 12.2% of the GDP in 2018-19.
- The capital expenditure component has dropped from 2% of the GDP in 2010-11 to 1.6% in 2018-19 and that of the revenue expenditure from 13.4% in 2010-11 to 10.6% in 2018-19.
- This decline in expenditure is driven by the government’s priority to contain fiscal deficit.
Impact on the GDP
- Most worrying part for economy is a fall in government spending. Although government has announced stimulus package for revival of economy, but actual fiscal support has not been commensurate as expected. Government-Fixed Capital Expenditure (GFCE) growth has declined by 22.2% in 2nd quarter after improvement of 16% in the first Quarter.
Why government is not able to provide direct fiscal support?
- Centre’s net revenue (tax and non-tax) collection for the first half of this fiscal is merely 27.3 per cent of the budget for the full fiscal year.
- Center’s capital expenditure has registered a decline of 11.6 per cent. Capital expenditure is defined as the money spent on the acquisition of assets as well as fresh investments
- Market borrowings of both the Centre’s as well as the states’ have increased by 50 per cent year-on-year basis. Due to that India’s public debt/GDP will likely reach around 85 per cent. High debt-servicing costs will further crowd out productive public expenditure.
- Central government fiscal deficit is also inflating.
Why there is a need of direct income support from the government?
Although government has announced stimulus package for revival of the economy that includes benefits for industries, poor people and MSMEs etc., however all these benefits may not be able to provide economy with the immediate boost required at this point of time;
- At times of slowdown in industrialised economies, there is idle productive capacity on the one hand and unemployed manpower on the other.
- Unemployment reduces the purchasing power capacity of the households, resulting in low aggregate demand.
- Increase in Government expenditure or investment on infrastructure lead to expansion of productive capacity and generate long-term economic growth.
- While the infrastructure spending and reforms are critical to sustain medium and long term growth, neither can boost near-term demand. A stimulus package focused on giving direct benefits to the middle-class could help alleviate the situation.
- Increase in direct benefit transfers to people lead to immediate increase in aggregate demand of household for goods and services. Increase in aggregate demand leads to fuller utilization of the existing productive capacity and employment generation.
- Thus, Fiscal spending (government expenditure), as against fiscal conservatism, is favoured because this can be mobilised quickly to deliver results in a shorter timespan while others need longer timeframes to get activated and deliver.
- Bank recapitalisation for increasing credit flow in the economy is another way to boost demand in the economy.
Way forward
Present time demands government to discontinue its fiscal conservatism approach centred on reducing its fiscal deficit. It is the time to boost the domestic demand by transferring direct benefits, as was done during the 2008 economic recession. Indian economy at that time proved to be resilient and performed far better compared to many developed countries at that time.
Private sector in India is not lacking funds as is the popular perception. It is the lack of confidence in the Indian economy and industries at present that investment in India are reducing. There are sufficient funds available for the government borrowings in the market.
India drops two ranks in Human Development Index
News: United Nations Development Program (UNDP) has released the Human Development Index (HDI) 2020.
Facts:
● HDI measures the average achievements in a country in three basic dimensions of human development:
○ A long and healthy life- measured by Life expectancy at birth
○ Access to knowledge: measured by Mean years of schooling and Expected years of schooling
○ A decent standard of living- measured by Gross National Income (GNI) per capita (PPP US$).
What is PHDI ?
UNDP has introduced a new metric this year called Planetary Pressures-adjusted HDI (PHDI).
PHDI reflects the impact caused by each country’s per-capita carbon emissions and its material footprint which measures the amount of fossil fuels, metals and other resources used to make the goods and services it consumes.
Key Takeaways of HDI 2020:
● Topped by: Norway has topped the index followed by Ireland, Switzerland, Hong Kong and Iceland.
● India in HDI 2020: India has dropped two ranks in the HDI index standing at 131 out of 189 countries. India’s HDI value for 2019 is 0.645— which put the country in the medium human development category
● BRICS: In the BRICS grouping, Russia was 52 in the human development index, Brazil 84, and China 85.
● Neighboring Countries HDI ranking: Bhutan (129), Bangladesh (133), Nepal (142), and Pakistan (154).
Other Takeaways from the index:
● Life expectancy of Indians at birth in 2019 was 69.7 years. This is worse than Bangladesh which has a life expectancy of 72.6 years. The life expectancy in Pakistan is 67.3 years.
● India’s gross national income per capita fell to $6,681 in 2019 from $6,829 in 2018 on purchasing power parity (PPP) basis.
○ Purchasing power parity or PPP is a measurement of prices in different countries that uses the prices of specific goods to compare the absolute purchasing power of the countries’ currencies.
● Solar capacity in India has increased from 2.6 gigawatts in March 2014 to 30 gigawatts in July 2019 achieving its target of 20 gigawatts four years ahead of schedule.In 2019, India ranked fifth for installed solar capacity.
For further reference: UNDP’s HDI and Other Indices
India’s retail inflation
Context- Retail inflation showed signs of easing in November, led by easing prices of some food items.
More in news-
Consumer Price Index inflation stood at 6.93% in November 2020 compared to 7.61% in October, according to data released by the Ministry of Statistics and Program Implementation, though it remained above the comfort level of the Reserve Bank.
What are the reasons for decline in CPI inflation?
- The movement in retail inflation is broadly driven by the movement in food and beverage inflation which has 46 per cent weight in the consumer price index.
- Within the food items, the inflation declined for vegetables to 15.63%, cereals and products 2.32%, meat and fish 16.67% and milk and products 4.98%.
- Inflation in the key transport and communication category that includes petrol and diesel eased by a marginal 10 basis points to 11.06%.
- The inflation for housing eased to 3.19%, while that for miscellaneous items was flat at 6.94% in November 2020.
- Within the miscellaneous items, personal care and effects 11.97%, recreation and amusement 4.57%.
What are the areas of concern for RBI?
- Inflation remained above the comfort level of the RBI-
- Out of the food basket of 12 items, inflation still remained in the double digits in the case of six.
- Key protein sources including pulses, eggs and meat and fish continued to register worryingly high levels of inflation.
- Worrying high transportation cost– With oil marketing companies continuing to raise pump prices of these crucial transportation fuels, it is hard to foresee any further appreciable softening in food prices in December.
- This put the RBI’s forecast for average fiscal third-quarter inflation of 6.8% in jeopardy.
Disrupted supply chain logistics, higher operational and labour costs, higher administrative fuel costs partly contribute to the upward inflation trajectory in recent months.
What is the way forward?
- Policymakers must guard against easing vigilance on prices while considering growth-supportive measures.
- Price stability must remain the monetary authority’s primary target.
- The decline in the CPI inflation print in Nov 2020 to 6.93 per cent from 7.61 per cent in Oct 2020 has definitely come as a relief to the bond markets.
Income support to mitigate income losses
Context- The government’s unusual reluctance in providing adequate support to the economy has purportedly been because of the lack of fiscal space.
Is India in a technical recession?
Technical recession– The National Bureau of Economic Research (NBER) in the US defines a technical recession to be in progress when real GDP has declined for at least two consecutive quarters.
- However, the growth rate is measured on a quarter-over-quarter, not year-ago, basis.
According to JP Morgan’s estimates – On quarterly basis, India’s GDP India’s GDP plunged 25 per cent in 2Q20 and recovered by 21 per cent in 3Q20.
- This implies that India did not suffer two consecutive quarters of negative growth.
- Therefore, India is not in a technical recession.
What is RBI’s survey suggests to real GDP growth?
RBI latest survey of professional forecasters (SPF) has forecast that real GDP is expected to recover in FY22 to 12 percent from -9 percent in FY21.
- This implies that six quarters from now it will still be about 7 per cent below the pre-pandemic path, or $300-billion-a-year of income losses across two years.
- Concern- This can cause great damage to household and SME balance sheets, to income inequality, to poverty, and to women’s employment
What are the issues with government policy?
- No income support– The income loss could have been mitigated by budgetary income support. However, the government chose not to provide this.
- Government consumption declined 22 per cent on a quarterly basis in 3Q.
- Limited support to the domestic economy – Despite the apparent lack of fiscal space at home, the RBI has been funding other countries’ fiscal deficits.
- RBI invested almost 3 per cent of GDP in foreign assets just in the first half of this fiscal year.
- India’s huge current account surplus is a bane– This reflected not economic strength but an economy imploding so much faster than others that India’s demand for imports fell faster than foreign demand for Indian exports.
- Ongoing recovery led by capital than wages – Indian companies reported a decline in sales. However, operating profits growth was in the double digits. Net profits grew even faster. Large firms achieved this by slashing costs.
- A recovery led by profits will not lead to higher investment demand as long as there is significant excess capacity in many parts of the Indian economy.
- As far as the labour market goes, unemployment has dropped below pre-covid levels, but that is partly because of a decrease in the labour participation rate.
What is the way forward?
Government needs to provide extensive income support to mitigate the income losses due to pandemic.
- Government needs to be ensured that the recovery is not hamstrung by damaged household and SME balance sheets because of the extended loss of wages and incomes.
- Infrastructure spending and reforms are critical to sustain medium-term growth, neither can boost near-term demand.
Overestimate GDP growth data
Context- The higher growth rate of the economy actually masks the decline in the unorganized sector.
What in the news-
The second quarter GDP contracted at a slower pace of 7.5 per cent compared to a massive 23.9 per cent in the first quarter of the current fiscal.
- The economy’s performance between July and September when lockdown restrictions were eased is better than most rating agencies and analysts anticipated.
Why GDP data should not be taken as sustainable recovery?
- The source of information is not reliable– Very little up-to-date primary information from factories and offices is available for the estimation.
- The data usually used to project quarterly growth rates were not available and so “some other data sources” were used.
- The method of calculation of quarterly growth rates is inaccurate.It was implicit in the method of estimation that this component could be proxied by the data from the organized sectors of the economy.
- Pent up demand- The healthy recovery in the second quarter represents meeting the pent-up demand after the ‘Unlock’ phase started in June.
How the proportionality between the unorganized and organized sectors disrupted?
- Due to demonetization– The cash shortage impacted unorganized sectors far more than the organized sector.
- The non-agriculture unorganized sector was disproportionately impacted by demonetization, as this sector consists of tiny units that work with cash.
- Implementation of the GST-The GST system favoured the organized sector, and demand shifted from the unorganized sector to the organized sector.
Why quarterly growth numbers are not robust?
- Collected data limited to organized sector only.
- The growth of the economy has been much less than that what is implied by the official GDP numbers.
- While trade has declined, data will indicate growth since it is available only from e-commerce and big stores [organized sector].
- If the data are taken only from the larger units, the decline of 20% to 30% will not be captured.
- Not all data are collected– The organized sector was able to restart business but not the unorganized sector due to low demand for the produce of unorganized sectors
Way forward-
- The quarterly growth numbers are not robust.
- It is difficult to predict that weather the economy is recovering or not, as the collected data was non comparable.
Dangers of misplaced optimism in economy
Context: The government’s economic recovery hype is no rights and this is not a time for fiscal conservatism.
What is current economic scenario?
- India’s economy contracted by 7.5% in the second quarter of financial year 2020-21 was, both good and bad.
- It is far lower than the 23.9% contraction registered in the first quarter of this financial year.
- second-quarter contraction is high with most similarly placed countries.
- Relaxation of lockdown restrictions during that quarter has not ensured automatic recovery.
What is government stance?
- Based on the evidence, the Finance Ministry’s Monthly Economic Report, for November, speaks of a V-shaped recovery reflective of “the resilience and robustness of the Indian economy”.
Why slowdown in contraction is no sign of recovery?
- Lockdown has affected employment, income and demand:
- Now since lockdown are relaxed, production must rise, not just to meet demands backed by the available purchasing power but also to restore inventories to normal levels across the distribution chain.
- Demand must return to and rise above pre-crisis levels for production to recover and grow.
- Burden on economy: The lockdown increased indebtedness and the bankruptcies. Lockdown induced affects are to be felt well after restrictions are relaxed.
- Decline in consumption: the decline in private final consumption expenditure at constant prices, which accounts for 56% of GDP, has come down but still remains high.
- Lack of consumer confidence: net incomes and consumer confidence are not at levels that can even restore last year’s levels.
- Less recovery in investment: the decline in fixed capital formation has fallen from a high minus 47% in the first quarter to minus 7% in the second, however, investment is still falling year-on-year.
- Half-hearted stimulus: Government Final Consumption Expenditure, which rose by 10% in the first half of 2019-20, relative to the corresponding period of the previous year, declined by 4% in the first half of 2020-21.
What government should do?
- Shun fiscal conservatism: Lockdowns limit production and result in a rundown of inventories.
- Government’s responsibility: the tasks of providing safety nets, reviving employment and spurring demand become crucial. The market cannot deliver on those fronts that is why state action facilitated by substantially enhanced expenditure is crucial.
- Increase borrowing: since government revenues shrink during a recession expenditure need to be funded by borrowing.
- GDP movements: need to understand the dynamic of the post-COVID-19 economy.
- Increase allocations for welfare expenditures: for example, subsidised food to minimal guaranteed employment.
What are the impacts on States?
- Squeezing expenditure at the State level: As per Office of the Controller General of Accounts, the total expenditure of the central government stood at 55% of what was provided for in the Budget for 2020-21, which was woefully inadequate even for normal times.
- Shortfall in spending: The shortfall in spending was sharper in the case of capital expenditure, with 48% of that budgeted being spent over April to October. The corresponding figure for 2019-20 was 60%.
- Fall in GST revenues: the government has decided not to compensate for the shortfall, as promised under the GST regime.
Indian economy witnessing V-shaped recovery: Finance Ministry report
Source: Click here
Finance Ministry’s Monthly Economic Review report has stated that the Indian Economy is witnessing a V-shaped recovery as the decline in the GDP has narrowed to 7.5% in the second quarter of 2020-21 from 23.9% in April-June quarter.
Facts:
- V-shaped recovery: It is characterized by a quick and sustained recovery in measures of economic performance after a sharp economic decline.
- Significance: Because of the speed of economic adjustment and recovery in macroeconomic performance, a V-shaped recovery is a best case scenario given the recession.
- Example: The recoveries that followed the recessions of 1920-21 and 1953 in the U.S. are examples of V-shaped recoveries.
Read Also : current affairs for upsc
Economic recovery
Context: A recovery led by profits, at the expense of wages, has implications for demand, inequality and policy.
- GDP is typically reported in two ways: The sectoral, production side (agriculture, manufacturing, services) and the functional, expenditure side (consumption, investment, net exports).
- Third way: On the income side, GDP is calculated as the sum of profits, wages and indirect taxes.
Discuss the role of factors of production in economic recovery.
- Capital: The economic recovery in many parts of the world is too twisted for comfort, driven excessively by capital than labour.
- If listed company profits are growing at 25 per cent, and yet GDP contracted 7.5 per cent, it reveals significant pressure on profits of unlisted SMEs, wages and employment.
- Labour market pressures around the world: US hiring slowed sharply in November and the unemployment rate is still forecasted to remain close to 6 per cent i.e. almost twice pre-COVID levels even at the end of 2021.
- Household demand for MGNREGA remains very elevated, suggesting significant labour market slack.
- The employment rate: Some labour market surveys still reveal about 14 million fewer employed compared to February.
- Nominal wage growth across a universe of 4,000 listed firms has slowed from about 10 per cent to 3 per cent over the last six quarters.
Why does this matter?
- Weak demand: It disincentivises re-hiring, reinforcing the risks of settling into a sub-optimal equilibrium.
- Worry for future demand: It may be normal for any one firm to boost profits by cutting employee reward. But if every firm pursued that strategy, It simply dismantles future combined demand and profitability for all firms.
- Acceleration of technological adoption: Differential productivity impacts on capital, skilled and unskilled labour, will likely have more deep impacts on the future capital-labour mix, possibly stressing existing inequities.
- Job-market pressures: If job-market pressures convince households into observing this shock as a quasi-permanent hit on incomes, households will be incentivised to save, not spend in the future.
- Global recovery: If labour market pressures dent private consumption, and an incomplete global recovery in 2021 dents export prospects.
- There will be no authoritative for entrepreneurs to invest, especially with manufacturing utilisation levels below 70 per cent heading into COVID-19 outbreak.
- Fiscal policy: US policymakers are negotiating yet another fiscal package, and only a small fraction of the large discretionary stimulus that the Euro Area and Japan injected will be reversed next year.
- India’s fiscal response has been controlled so far. It’s therefore important for the Centre to step up spending in the remaining months.
What is the way forward?
- Public investment and a large infrastructure push: Must be the theme of the next budget. This will be crucial to boost demand, create jobs, crowd-in private investment and improve the economy’s external competitiveness.
- Monetary to fiscal: In 2021, the stick must pass from monetary to fiscal, especially since the latter is a more surgical instrument to target SMEs and the labour market.
GDP recovery- questionable data
Context- The Q-2 sharp recovery is very tactical because of pent-up demand, because of lockdown and the Data used for quarterly growth rates are weak and questionable.
What in the news-
The second quarter GDP contracted at a slower pace of 7.5 percent compared to a massive 23.9 percent in the first quarter of the current fiscal.
- The economy’s performance between July and September when lockdown restrictions were eased is better than most rating agencies and analysts anticipated.
Critic’s view– India had introduced one of the strictest lockdowns in the world which has resulted in the sharpest output contractions and massive losses in terms of jobs and livelihoods.
Why GDP data should not be taken as sustainable recovery?
- The source of information is not reliable– Very little up-to-date primary information from farms, factories and offices is available for the estimation.
- Pent up demand- The healthy recovery in the second quarter represents meeting the pent-up demand after the ‘Unlock’ phase started in June.
However, the quarterly figures do indicate the broad direction of change.
- GDP in the manufacturing sector– It rose 0.6 percent in the September quarter, in a big sign of recovery compared with a crash of 39.3 percent in the April-June period.
What are the challenges for sustainable recovery?
- Weak aggregate demand-
- Revenue shortfalls- The government’s debt-GDP ratio has gone up though.
- Bank credit growth in the economy continues to decelerate.
- The cumulative growth of the index from April to October this year stood at negative 13% when compared to the same period last year.
- Balance of payment surplus– the shortfall is on account of a sharp decline in investment demand, denting potential output.
- Both exports and imports have shrunk but imports have shrunk relatively more than exports, such a sharp fall in import demand does not augur well for a growing economy such as India.
- Rising foreign exchange reserves- India’s flourishing foreign exchange reserves are made up of short-term debt flows; they are not our net export earnings.
- Sudden booming stock market– This entirely driven by short-term foreign capital inflows.
- Such inflows are highly fickle, representing hot money, which can quit the financial markets in a jiffy if perceptions change for any exogenous reason.
Way forward-
- As an additional expenditure on government consumption or investment or credit growth remain muted, recovery is likely to remain modest.
- Economic recovery could still prove to be premature and illusory – Economists have reservations about reading too much into the September-October data as a sustainable trend.
Present State of economy
Context: The pandemic has delivered a “scissor cut” to the government finances.
What is the current scenario?
- Economic output and government revenues are shrinking.
- The government has to spend more to safeguard lives and livelihoods.
- Widening deficit.
- Most of state’s revenue come from center which changes their debt servicing ability for the worse.
What are the recent issues?
- Revenue side:
- In the first half of fiscal the center’s net revenue (tax and non-tax) collection stood at 27.3% of budget for the full fiscal year compared to 41.6% of previous fiscal year.
- Revenue collections in the first half of the year were down to 32.5% as compared to an average 15% growth over the same period.
- State’s fiscal issue:
- Fiscal data for the year is available only for the eleven non special category states.
- Revenue of these states is down by 21.5%.
- Adding center’s transfer to the states then the decline in revenue reduces to 16.5%.
- Shortfall in states’ revenue is much steep than that of center.
- For the eleven states total expenditure and capital spending have contracted by 1.5% and 23.4 % respectively.
- Allocation for pension and subsidies down by 10% and 20%.
- Since health is State subject, state will have to shoulder major part of health expenditure burden on account of the pandemic.
- Cutting capital expenditure:
- Both center and state have cut their capital expenditure.
- This is worrying as states undertake more as they have more than 60% of the overall general government capital expenditure.
- For instance, in 2019-20, capital expenditure by states stood at rs 4.97 lakh crore down by 20%.
- Low capacity utilization: for instance, it was 71.9 % in the previous year which is down to 58.6 %.
What are the consequences?
- Reduces Center’s and states’ ability to invest and lift the economy.
- Need of more borrowing.
- Centre’s total expenditure has been declined by 0.6 % which led to 11.6% decline in capital expenditure with revenue expenditure by 1 %.
- To maintain states ‘spending government has forced them to increase borrowing which has led to increase in market borrowing by 50%.
- Rising debt level of states. For instance, overall government general debt stood at nine year high.
- Centre’s debt to GDP is declining.
- Ratio of interest payment to revenue receipts is also declining which raises question on sustainability of debt.
- The private sector will remain wary of investing as demand uncertainty continues.
Export: A key to economic growth
Context: Arvind Panagariya’s new book, India Unlimited: Reclaiming the Lost Glory, discuss systematically how to reconstructs a path to higher growth.
What is the present scenario?
- Public sectors confronting a mountain of debt, the fiscal will need to be reined in post-COVID across several emerging markets.
- COVID-19 will accentuate the prevailing export pessimism, as global potential growth is damaged and protectionist instincts are stoked.
- The choice and sequencing of reforms will depend critically on the growth philosophy India embraces.
What are the possible strategies?
- India’s size provides fertile ground for import substitution. However, this approach was not successful in the past.
- The most significant is to underscore the necessity of export-led growth to India’s prospects.
- No emerging market has been able to sustain 7-8 per cent growth for any length of time without relying on the Siamese twins of exports and investment.
- Dismantle the underpinnings of export pessimism.
Why there is need to focus on exports?
- Prospects in exports: Global merchandise exports stood at almost $18 trillion in 2017 (more than six times India’s GDP) with India commanding an export share of just 1.7 per cent (versus China’s 12.8 per cent).
- Doubling exports: Even if the global market shrinks to $15 trillion, India could double its exports by raising its global market share to just 4 per cent. India’s 2002-2010 growth boom was underpinned by exports, which grew 18 per cent a year for eight years.
- Labour-intensive manufacturing: For many labour-intensive tasks, automation is still infeasible. Adidas, for example, produces only 1 million of its 360 million pairs of shoes in automated factories.
- Geopolitical reasons: Chinese real wages are rising; the workforce is shrinking and the embattled relationship with the US.
- Integration: integrate into the Asian supply chain by attracting multinational companies seeking a China hedge in the region.
- Create jobs: exports can create manufacturing jobs which will serve as a powerful magnet to attract labour away from agriculture. By 2030, agriculture will constitute less than 10 per cent of GDP while still employing 35-45 per cent of the workforce.
What are the challenges that lie in front of India?
- India’s fragmented industrial structure: It’s estimated almost 60 per cent of India’s manufacturing workforce is employed in firms with five or less workers, and 75 per cent in firms with 50 or less workers.
- Low productivity and low wages: For example, 92 per cent of workers in the apparel sector worked in firms with less than 50 workers. In contrast, 57 per cent of China’s apparel workforce were employed in firms with more than 200 employees.
What needs to be done?
- Avoiding the import-substitution trap.
- Reduce Import tariff which are equivalent to an export tax.
- Ensuring the rupee remains competitive.
- Boosting free trade agreements and trade facilitation.
- Creating autonomous employment zones (AEZs) where factors of production are less distorted.
- Reduce the gulf in per-capita incomes between agriculture, industry and services.
- Create higher-wage jobs in industry and services for agricultural workers to migrate to.
Base year of CPI-IW changed
The Labour and Employment Ministry on Thursday revised the base year of the Consumer Price Index for Industrial Workers (CPI-IW) from 2001 to 2016.
Why the base year for the Consumer Price Index for Industrial Workers(CPI-IW) has been changed?
Due to the changing consumption pattern, more weightage has been given to spending on health, education, recreation and other miscellaneous expenses while the weight of food and beverages has been reduced.
Consumer Price Index (CPI) for Industrial Workers
It measures changes in the price level of a market basket of consumer goods and services purchased by households.
CPI data is released monthly by the Central Statistics Office (CSO) which functions under the Ministry of Statistics and Programme Implementation.
There are four types of CPI: a) CPI-IW (Industrial Worker), b) CPI-UNME (Urban Non-Manual Employees), c) CPI-AL (Agricultural Labourers) and d) CPI-RL (Rural Labourers)
RBI has adopted CPI as the key measure for determining the inflation situation of the Indian economy on the recommendation of the Urjit Patel Committee.
Usage of CPI-IW
CPI-IW is used:
- To regulate the dearness allowance (DA) of government staff and industrial workers.
- Apart from measuring inflation in retail prices.
- To revise minimum wages in scheduled employments.
After this Index, the government is expected to announce a new series of the CPI for agriculture workers, which is currently using the base year of 1986-87.
Need for Base years
Base years are required to facilitate inter-year comparisons of various data. if an index is using 2011-12 as the base year, data of all future years will be calculated based on the data of the index in 2011-12, for the purpose of comparison.
Example: Let’s say the cost of a basket of goods in an index was Rs 6 lakh in the base year (2016), and has been set to an index value of 100. If in 2017, the basket cost has been increased to Rs 6.6 lakh, the index equivalent would be 110.
The inflation rate will be computed by comparing 110 which is today’s value to the base value which is 100, resulting in a 10% increase.
Base years are used to nullify the impact of inflation on the data and project the actual estimates.
Thus, for selecting a year as the base year, certain requirements should be fulfilled, such as:
- The year must be a normal year and not have experienced any abnormal incidents such as earthquakes, droughts, floods, etc.
- No abnormal economic activity like Hyper rise in price should have taken place.
- Base year should not be very far from the current year.
Bangladesh’s per capita income greater than India’s
Source: Indian Express
Syllabus: Gs3: Indian Economy and issues relating to Planning, Mobilization of Resources, Growth, Development and Employment.
Context: For the year 2020, the per capita income of an average Bangladeshi citizen would be more than the per capita income of an average Indian citizen.
Why India’s per capita income has fallen below Bangladesh this year?
- Contracted Growth: India’s economy is over 10 times the size of Bangladesh and India’s growth surpassed Bangladesh during 2004 to 2016. However, since 2017 India’s growth rate has decelerated while Bangladesh’s growth rate increased.
- Increase in population growth: Per capita income is calculated by dividing the total GDP by the total population. Compared to Bangladesh, between 2004-2019 India’s population growth was high.
- Covid 19 impact: With India’s GDP set to reduce by 10%, India is one of the worst affected economies whereas Bangladesh GDP expected to grow by 4%.
How has Bangladesh managed to grow so fast?
- Moving away from Pakistan gave the country a chance to plan its own economic and political identity.
- Flexible Labour laws and Higher female participation in the labour force leading to stellar export performance in garments and apparel industry.
- Structure of Bangladesh’s economy is led by the industrial sector, followed by the services sector. With manufacturing sector being more labour intensive creates opportunities for more jobs and are more remunerative than agriculture.
- Whereas India, on the other hand, has struggled to boost its industrial sector and has many people still dependent on agriculture.
- Improvement on social and political metrics such as health, sanitation, financial inclusion, and women’s political representation.
- In the latest gender parity rankings, Bangladesh is in the top 50 Out of 154 countries, while India is at 112.
- The gender parity rankings measures differences in the political and economic opportunities as well as the educational attainment and health of men and women.
- Bangladesh has also performed better in the Global Hunger Index. GHI focuses on four factors: Undernourishment, Child Wasting, Child Stunting and Child Mortality.
However, the level of poverty and illiteracy is still high in Bangladesh, compared to India, resulting in low HDI rank for it. Corruption, Political conflicts and radicalisation are also threatening stability in Bangladesh.
To boost growth, India should reverse its protectionism measures — lower tariffs, embrace free trade agreements, and seek greater integration with global supply chains.
Indian economic recovery – Unlock phases
Source- The Indian Express, The Indian Express
Syllabus- GS 3- Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment
Context– India’s economy shrank nearly 24 percent in first [April-June] quarter of 2020, the most drastic fall in decades.
Reasons for GDP contraction
- Draconian lockdown– India had the most intense lockdown starting from March 25, resulting in the unprecedented suspension of economic activity in the first quarter of this fiscal year.
- Parsimonious fiscal response– Fiscal response of the free food, subsidized credit and a handful of transfers to the most vulnerable not only limited the contribution of government spending to the economy, but was also insufficient to offset the drag caused by households and firms scaling back consumption and investment.
- Low growth rate in consumption, investment and export– GDP is contracted because Private consumption, investments by businesses and Import which account for over 88% of Indian total GDP, saw a massive contraction.
Advantages of early lockdown-
- Slowed down the spread of the virus to provide extra time to resist.
- Provided extra time to ramp up the health and testing infrastructure.
- Lower death count as compared to other affected countries.
Figure regarding GDP decline due to COVID-19, economics green shoot and recovering economy in unlock phase-
Figure 1-
- GDP being 23.9 per cent lower was primarily due to the pandemic-induced lockdown.
- India’s death per lakh is an order of magnitude is lower.
- India’s humane economic policy based on the principle that while GDP growth will recover but human lives that are lost cannot be brought back.
Figure 2-
- The green shoots before the pandemic display that the government’s policy thrust since July 2019 was having the desired impact.
- The services sector has been most affected by the need for social distancing and the lockdown.
- The purchasing managers index (PMI), had trended up sharply with Services PMI registering the best growth by February before dropping precipitously below 50 per cent in March.
Figure 3 and table1-
- The V-shaped recovery in these indicators suggests that the government’s measures are enabling a recovery in the unlock phase.
Different Phases to return to normalcy-
- Gradual unlocking– Gradual process of unlocking, with supply-chain normalization and pent-up demand resulting in faster sequential momentum.
- Exiting from the lockdown– The post-lockdown pent-up demand typically fades, while operations plateau below the pre-pandemic levels
- Exit path from the pandemic– Going back to pre-pandemic levels either through the flattening of the curve, the emergence of vaccines or the development of herd immunity.
- Post-pandemic new normal– Fourth phase in which potential growth settles lower
Way forward-
Coordinated fiscal and monetary policies are required to finance higher deficits. The RBI has focused on support via liquidity in secondary markets and other regulatory measures to bring yields down, flatten the yield curve, and incentivize banks to buy more government paper. Debt monetization, as Indonesia has already done, might be the second round of defence in coming months.
COVID – 19 and India’s road to economic revival
Source – The Indian Express
Syllabus – GS 3 – Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment.
Context – ‘Unlocking’ and ‘Revival package from the government’ are the two basic factors that will determine the course of India’s economy for the rest of the year.
Impact of COVID-19 on GDP
GDP contraction– India’s economy shrank nearly 25 percent in last quarter, the most drastic fall in decades. The following sectors reflects how deep the problem is-
- Public administration– Higher government spending was in the form of transfer payments rather than spending on goods and services, which resulted in a negative growth number.
- Manufacturing and Services– The sector has been in the negative zone across the board due to the national lockdown since end of March.
Factors that influence the growth prospects for the coming quarters
1st Factor – Unlocking economy activity-
- Unlocking frictionsin nine core sectors and the MSME segment, which make up 75 per cent of the pre-pandemic GDP, can significantly uplift the economy.
The following sectors are-
Challenges
- Industries in which it is harder—
- Travel or Entertainment— It will still be in a gradual normalization process, and probably won’t rebound completely until a vaccine is available.
- Real estate– The present stress on home loans can hinder a revival in the residential real estate.
- Unchanged scenarios– Based on the first quarter performance, 25 per cent of the economy, which would be in the services category, would probably still be struggling in the fourth quarter.
2nd Factor – Revival package from the government
- Additional capital expenditure- By increasing capital expenditure [capex], the government can begin a virtuous cycle of creating assets as well as providing employment. This will create a dual impact on the economy.
- Transfer of Cash benefits– Money in the hands of people can provide an immediate sense of security and confidence, which is the cornerstone to restoring economic normalcy. This will raise the consumption and demand of the economy and can bring back the virtuous cycle in play.
- Banking system-COVID-19 assistance measures undertaken by the Reserve Bank of India (RBI) and the government such as interest rate reductions, credit guarantee and liquidity enhancement schemes are welcome steps.
Way forward
Government can certainly make a difference by altering its stance on fiscal policy, going in for some pump-priming. It is important to address and resolve ground level issues sector-wise and industry-wise in order to formulate the new policies.
To Rebuild and Recover from COVID-19
Source: Indian Express
Syllabus: GS3: Mobilization of Resources, Growth, Development and Employment.
Context: India needs to focus on rebuild and recover to achieve economic growth of 7-8 per cent.
Need to address some traditional sore points:
- Pandemic impact: Indian economy is suffering due to the pandemic with declining growth and limited scope for a fiscal stimulus.
- Demand-supply issue: India’s slowdown is largely a structural demand problem that cannot be addressed through piecemeal aid and transfers.
- Contrast in GDP growth:
- First phase- when growth was driven by domestic investment and global growth.
- Second phase- the post-global financial crisis stimulus phase.
- Third phase- the leveraged consumption phase. The economy is estimated to have lost around Rs 20-28 trillion due to a lockdown, with FY2021 growth likely to be around (-) 11.5 per cent.
- Focus on demand side: Consumption led growth provides limited scope for a sharp recovery over the medium term without exogenous (and often unsustainable) triggers.
- To prioritise long term growth: broaden the consumer base by empowering the low and middle-income consumers rather than pushing consumption itself.
- To protect India’s labour market: If the pandemic results in a prolonged retrenchment of the workforce, it will deepen faultiness in labour market.
- Uncertainty and savings: temporary incomes coupled with income uncertainty will induce precautionary savings without any impact on growth.
- Poor social security: The PLFS 2018-19 report places around 24 per cent of the workforce in the regular wage/salary category. However, around 40 per cent do not have a written contract, paid leaves, or security while 70 per cent do not have any written contract. Since most of the workers are informal employee, consumption-led growth in the aftermath of a crisis become a substantial risk.
Steps that should be taken to reform, recovery and rebuild:
- Increase public borrowing: since revenues have cratered, funding of additional expenditure should be done through higher borrowing. public spending should be directed towards sectors such as roads, railways, infrastructure, healthcare and educational facilities to help rebuild the economy
- Set up a Development Financing Institution, and an asset monetisation programme.
- Increase sustainable investment: debt should be seen in the context of future investments being hampered due to current consumption.
- Streamline processes for quick approvals and ensure timely payments to private operators.
- Fiscal prudence: India’s public debt/GDP will likely reach around 85 per cent and the consolidated gross fiscal deficit to GDP ratio could be around 12.5 per cent this year. These metrics will take quite a few years to revert to pre-COVID levels and rapid consolidation will adversely impact growth.
- Any kind of “stimulus” should be well-targeted and have a large multiplier effect.
- Creating steady and well-paid employment for the bottom and middle segments: to broaden its consumer base beyond the top 10-20 per cent of the population to improve long-term growth prospects.
- Inclusive growth: focus on infrastructure and manufacturing as the PLFS 2018-19 report indicates that around 50 per cent of the rural non-agriculture workforce and 35 per cent of the urban workforce is engaged in the construction and manufacturing sectors.
- Make manufacturing easier: the focus should be on labour reforms, fewer/quicker approvals, reducing the compliance burden, and promoting export-oriented sectors.
India needs to address traditional sore points such as the large infrastructure deficit, the weak financial sector, archaic land and labour laws, and the administrative and judicial hurdles to protect a decade of favourable demographics.
Int. Trade and WTO
Issue of Digital Services Tax between India and US – Explained
Table of contents
Recently the U.S. determined India’s Digital Services Tax (DST) as discriminatory. It concluded that the DST is causing an adverse impact on American commerce and hence, an action needs to be taken under trade act. Meanwhile, The USTR also said, “DST by its structure and operation discriminates against U.S. digital companies”. But the USTR in its special 301 report missed few important aspects and also completely neglected the global need to tax digital services.
What is Digital Services Tax (DST)?
In 2016 India introduced a 6% equalisation levy. But the levy was restricted to online advertisement services (commonly known as “digital advertising taxes” or DATs). In simple terms, the levy applied on the payments made to a non-resident by the Indians for advertising on their platform.
The government in 2020 introduced an amendment to the equalisation levy in the Finance Bill 2020-21. The important amendments include,
- A 2% Digital Service Tax (DST) was imposed on non-resident, digital service providers. With this amendment, the foreign digital service providers have to pay their fair share of tax on revenues generated in the Indian digital market.
- The amendment widens the tax to include a range of digital services. These services include digital platform services, software as a service, data-related services, and several other categories including e-commerce operations.
- Companies with a turnover of more than Rs. 2 crores, will pay this tax.
Why India introduced the Digital Service Tax?
First, the nature of digital service companies. These companies don’t have any physical presence in the markets. Instead, they use intangibles to provide services. For example, one can pay for the Amazon Prime membership in India. But the services of prime membership like watching movies, listening to songs are intangible.
Determining the value of these intangibles is tough. So the government introduced the Digital Service Tax of 2% on non-resident service provider’s revenue in India.
Second, the failure of international consensus. In 2013, the OECD (Organisation for Economic Co-operation and Development) launched the Base Erosion and Profit Shifting (BEPS) programme. It was launched primarily to find a way to tax digital companies. But no consensus has been achieved yet. So, in 2016 India became the first country to implement the equalisation levy as a temporary way of taxation. This is then followed by countries like France, UK, etc.
Third, India’s right to tax digital service providers. If a company has users in India and also has an economic connection with India then, India has the right to tax its economic operation. India being a developing country provides large markets for digital corporations. So taxing them is a matter of right.
Fourth, These DST create a level playing field between online and regular (brick and mortar businesses). In 2016, the Akhilesh Ranjan Committee Report had also suggested to tax the digital companies as they enjoy a sustainable economic presence.
What are the accusations mentioned by the US? What India said in reply?
The first accusation, DST is inconsistent with the principles of international taxation. International taxation laws apply to the revenue of companies (not on income), extraterritorial application of DST (Digital service companies present outside India), etc.
- Indian reply: Several global tax measures like royalty, technical fees are not levied on revenue. Similarly, all US states have laws on remote sellers, and they tax non-US resident entities.
The second accusation, DST does not extend to identical services provided by non-digital service providers. This is a violation of trade practices.
- Indian reply: When the company is non-digital (i.e., brick and mortar) then that company is subject to Indian income tax. Further, this DST has been introduced to provide a level-playing field.
The third accusation, DST is discriminatory because it targets US companies.
- Indian reply: The DST is applicable to all digital service providers having an annual turnover of more than ₹2 crores in India-based digital services. As per USTR’s own analysis, only 119 companies in the world would likely be subject to the DST, of which 86 are U.S. companies. So the criteria do not target anyone. It is the result of the asymmetric digital power of US companies.
First, the DST as a tax policy targets a single sector (digital services). Economic experts argue that framing a tax policy to target a particular sector is unfair and have disastrous consequences for the growth of that sector.
Second, digital service providers might pass on the tax to consumers. Ultimately, burdening consumers. Just like service tax passed on to consumers, DST can also pass on to consumers if the service provider wishes.
Third, not feasible to separate the digital economy and the global economy. The growing digitization has blurred the line between them. This is one of the prime reasons due to which OECD is unable to arrive at a consensus.
Fourth, the DST might attract Retaliatory Tariffs. The USTR investigations pose a threat of retaliatory tariffs and might trigger the trade war between India and the US. Even the slightest retaliatory tariff will affect the Indian ICT industry’s growth.
First, India can follow the U.K. model of DST. The major advantages of the U.K. model are,
- The U.K. allows companies to not pay any tax if their net operating margin is negative. By including this, India can avoid criticisms like India’s equalization levy is on revenue and shift towards the profit of the company.
- India can consider taxing only 50% of the revenues from the transactions involving three jurisdictions. For example, an Australian user located in India receiving services from a U.S. company. This will make Indian DST more inclusive and also garners international support.
Second, India has to remain committed to the OECD process. Apart from that, India can mention the ways to tweak DST design or try to achieve consensus. This will make India move ahead and phase out DST and roll out the new agreed tax policy of OECD.
Third, the U.S. government has to realize the challenges in taxing digital service providers and also have to participate in these global talks. This will not be only beneficial for other countries but also a way to make these digital giants accountable.
More than 24 countries have either adopted or are considering adopting, a DST or a DAT after the concept got introduced in India. So the tax challenges posed by the digital economy is not a problem between India and the US. It is a global problem and the US has to accept this and act accordingly.
Delhi HC stays Future-Reliance deal
What is the News?
Delhi High Court has provided interim relief to e-commerce major Amazon. It directed Future Retail Limited(FRL) to maintain the status quo with regard to the transfer of its retail assets to Reliance Retail.
What are the issues in the Future-Reliance deal?
- What is the Future-Reliance deal? In 2020, Biyani’s Future Group has entered into an agreement with Reliance Retail. Under this deal, Future was to sell its retail, wholesale, logistics and warehousing to Reliance.
- Why has Amazon objected to the deal? In 2019, Amazon had acquired a stake in Future Coupons in an agreement. As per Amazon, under this agreement, it has the first right of refusal in any stake sale in future retail.
- Why did Amazon approach Singapore International Arbitration Centre(SIAC)? Amazon and Future Group have under their agreement agreed to refer their disputes to SIAC. Hence, Amazon approached SIAC to appoint an emergency arbitrator to get urgent interim relief.
- SIAC ruling: SIAC emergency arbitrator had ruled in Amazon’s favour. It put the Future-Reliance deal on hold.
What is the issue now?
- Enforcement of Ruling: Currently under Indian law, there is no mechanism for the enforcement of the orders of the Emergency Arbitrator. However, a party can move the Indian High Court under Arbitration & Conciliation Act,1996 to get similar reliefs as granted by the Emergency Arbitrator.
- What has the Delhi High Court said? It ruled that the order of the SIAC was enforceable in India the same manner as an order of this court. This provision is covered under Section 17(2) of Arbitration and Conciliation Act.
Source: The Hindu
Trade with China shrank in 2020, deficit at five-year low
News: According to the data from China’s General Administration of Customs (GAC), India’s trade with China declined in 2020 to the lowest level since 2017, with the trade deficit narrowing to a five-year low as India imported far fewer goods from China.
Facts:
Source: The Hindu
Data Related to Trade between India and China:
- Bilateral Trade: The bilateral trade between India and China has decreased by 5.6% to $87.6 billion in 2020.
- Imports and Exports: India’s imports from China shrank by 10.8% to $66.7 billion marking the lowest level of inbound shipments since 2016. However, India’s exports to China have jumped 16% crossing the $20 billion mark for the first time to a record high of $20.86 billion.
- Trade Deficit: The trade deficit which shows the difference between exports and imports shrank to $45.8 billion, the lowest level since 2015.
- What were the goods traded between India and China? There was no immediate break-up of the data for 2020. India’s biggest import in 2019 was electrical machinery and equipment worth $20.17 billion. Other major imports in 2019 were organic chemicals ($8.39 billion) and fertilizers ($1.67 billion) while India’s top exports were iron ore, organic chemicals, cotton, and unfinished diamonds.
- Significance: The drop in India’s imports from China was largely due to a slowdown in the domestic demand in the wake of the pandemic. Hence, this makes it difficult to determine whether 2020 is an exception or marks a turn away from the recent pattern of India’s trade with China.
Data Related to China’s Trade with Other Countries
- Positive foreign Trade growth: China was the world’s only major economy to have registered positive growth in foreign trade in goods.
- ASEAN and EU: Exports to the ASEAN bloc, China’s largest trading partner in 2020 with bilateral trade amounting to $684 billion rose 6.7% while exports to the EU, China’s second-largest trading partner also rose 6.7% as total trade reached $649 billion.
- US: In 2020, the trade between China and US was up 8.3% to $586 billion with China’s exports rising 7.9% to reach a record $451 billion.
- The trade surplus with the U.S expanded to $317 billion in 2020, compared with the $288 billion at the end of 2017 underlining the limited impact of the tariff measures, trade war and pandemic.
After rice, India’s wheat exports register highest ever export in six years: US Department of Agriculture.
News: US Department of Agriculture(USDA) has released its forecast of Indian wheat exports for 2020-21(July-June). USDA has estimated India’s Wheat Exports for 2020-21 (July-June) to be around 1.8 million tonnes (mt), as against its earlier estimate of one mt. That would be the highest ever in the last six years.
Facts:
India’s Wheat Exports:
Source: Indian Express
- Wheat: It is the second most important cereal crop. It is the main food crop, in the north and north-western part of the country.
- Climate: This rabi crop requires a cool growing season and bright sunshine at the time of ripening. It requires 50 to 75 cm of annual rainfall evenly- distributed over the growing season.
- Wheat Growing Regions: There are two important wheat-growing zones in the country – the Ganga-Satluj plains in the northwest and the black soil region of the Deccan. The major wheat-producing states are Punjab, Haryana, Uttar Pradesh, Bihar, Rajasthan and parts of Madhya Pradesh.
- Reason for India’s higher wheat exports: Due to surging international prices from Chinese stockpiling and ultra-low interest rate money increasingly finding its way into agri-commodity markets.
- Concerns: Indian wheat is still not competitive at the government’s minimum support price(MSP) of Rs 19,750 per tonne. The export price of wheat bought in Gujarat is around Rs 20,950 per tonne. That works out to $286 per tonne or $290-plus after adding exporter margins. The above price is higher than the $275-280 that major exporters such as Australia, France, the US, Russia and Canada quoted.
- Suggestions: This disadvantage can be overcome if wheat is sourced at below MSP from Uttar Pradesh, Bihar, Gujarat and Maharashtra where not much government procurement happens.
- The new crop arriving in these markets would be available at Rs 17,000-18,000/tonne. This wheat can be exported by rail rakes to Bangladesh or shipped to the Middle East (UAE, Oman and Bahrain) and Southeast Asia (Indonesia, Vietnam and Malaysia).
India’s Rice Exports:
- Rice: It is the staple food crop of a majority of the people in India. Our country is the second-largest producer of rice in the world after China.
- Climate: It is a Kharif crop that requires high temperature, (above 25°C) and high humidity with annual rainfall above 100 cm. In the areas of less rainfall, it grows with the help of irrigation.
- Rice Growing Regions: Rice is grown in the plains of north and north-eastern India, coastal areas and the deltaic regions. The development of a dense network of canal irrigation and tube wells have made it possible to grow rice in areas of less rainfall such as Punjab, Haryana and western Uttar Pradesh and parts of Rajasthan.
- India’s Rice Exports: USDA has estimated that India’s rice imports have hit a record 14.4 mt in 2020 up from 9.79 mt and 11.791 mt of the preceding two years. The country’s closest competitors – Thailand and Vietnam – have seen their exports during this period.
USTR slams India’s Equalisation levy
News: US Trade Representative (USTR) has released the findings of the Section 301 report.
Source: The Hindu
The report has said that India’s 2% equalisation levy is unreasonable or discriminatory potentially attracting withdrawal of US trade concessions or duties on Indian exports.
What is Equalisation Levy?
- When was 2% Equalisation Levy introduced? In the Finance Bill 2020-21 a 2% digital service tax (DST) was imposed on non-resident e-commerce operator in India.
- Eligibility: Companies with a turnover of over Rs. 2 crore, will pay this levy on the consideration received for online sales of goods and services.
- Purpose: The purpose of the levy is to ensure fair competition, reasonableness and exercise the ability of governments to tax businesses that have a close nexus with the Indian market through their digital operations
Why USTR is concerned?
- USTR is mainly concerned as 72% companies that will face the levy are American.
- Aggregate tax bill for US companies will exceed US $ 30 Million.
What does the Special 301 Report say on Equalization levy?
The USTR report has said that the Equalisation Levy is a violation of international tax principles:
- Firstly, it is discriminatory as the law explicitly exempts Indian companies while targeting non-Indian firms.
- Secondly, levy is contravening the international tax principle that companies absent a territorial connection to a country should not be subject to that country’s corporate tax regime.
- The third issue is of taxing revenue instead of income. This is inconsistent with the international tax principle that income—not revenue—is the appropriate basis for corporate taxation.
- Fourth, levy is discriminating against US companies. As shown above, majority of the affected companies will be American.
What are the justifications by the Indian Government?
- India has said that levy does not discriminate against US companies as it applies equally to all non-resident e-commerce operators irrespective of their country of residence.
- The levy does not have extraterritorial application as it applies only on the income generated from India.
- Government is in its rights to tax digital transactions as the levy is recognition of the principle that in a digital world, a seller can engage in business transactions without any physical presence.
- In addition, Equalisation levy was one of the methods suggested by the 2015 OECD/G20 Report on Action 1 of BEPS Project which was aimed at tackling the taxation challenges arising out of digitization of the economy.
- Equalisation levy is a way to tax foreign digital companies and seen as a temporary alternative to the GAFA (Google, Apple, Facebook and Amazon) tax until such measure is well defined in India.
Additional Facts:
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UK-India Free Trade relations and Cairn Energy PLC issue
Synopsis: With the conclusion of UK-EU trade agreement, now there is an opportunity to work towards UK-India Free Trade Agreement but resolving Cairn Energy issue must be a priority for that.
Introduction
Present developments provide an opportunity for both India and UK to move the bilateral economic plan forward.
- Both countries have common interest in the issues, such as climate change and the green economy, economic recovery of both the countries from COVID-19.
- After the conclusion of UK-EU trade agreement, UK can now focus on concluding trade agreements with key partners like India.
- The Oxford/AstraZeneca vaccine which has been approved in the UK was developed in collaboration between the Pune-based Serum Institute of India and the Wockhardt factory in the UK.
Importance of resolving Cairn Energy PLC issue
The recent ruling of arbitration court in the favour of Cairn Energy PLC marks an end to the long-running dispute between Cairn Energy PLC and the Indian government over a retrospective $1.2 billion tax demand imposed in 2015.
For India-UK trade to move forward and save the cost of arbitration, this issue need to end here.
- Cairn Energy PLC was one such global investor whose belongings in India were held in an Indian company in which Indians sat on the board, which had Indian senior management, where many of the engineers were Indian.
- The Cairn India got success from a significant calculated risk. The resources which Cairn Energy PLC bought from an international major had failed to find hydrocarbons on the land.
- The purchase came with a major capital risk to drill several wells to totally explore the fields in Rajasthan.
- After the oil discovery, Cairn Energy PLC then developed these fields and installed new technology to extract the oil and transport it to refineries.
- During this entire period Cairn Energy PLC paid all taxes and dues on time and also invested in the local community, creating valuable infrastructure and jobs.
Thus, there is no reason for dragging this matter any further.
Why resolving cairns India issues will be beneficial for India?
The Indian government has publicly stated in the past that the decision of the court would be honoured, so the decision of the court should end the matter.
- Firstly, timely and logical settlement of this dispute would lead to an instant validation of the desirability of India as an investment destination and also to India’s status in the international and domestic debt and equity markets.
- Secondly, a practical solution to the Vodafone and Cairn Energy judgments would improve India’s position at the top table of global economic powers.
- Third, as stated above, it was one of the thorny issues in the India-UK relations and good relations with UK will open many opportunities for India in the EU region.
Current account surplus moderates to $15.5 bn in Q2
Source: The Indian Express
News: The current account surplus moderated to $15.5 billion (2.4% of GDP) in the quarter ended September of 2020-21 from $19.2 billion (3.8% of GDP) in the first quarter this fiscal.The current account saw a deficit of $7.6 billion(1.1%) in the year-ago quarter.
Facts:
- Why has current account surplus narrowed? The narrowing of the current account surplus in Q2 of FY21 was on account of a rise in the merchandise trade deficit to $14.8 billion from $10.8 billion in the preceding quarter.
Read Also : Current affairs for upsc
Current Account:
- What is the Current Account? Current account maintains a record of the country’s transactions with other nations, in terms of trade of goods and services, net earnings on overseas investments and net transfer of payments over a period of time, such as remittances.
- This account goes into a deficit when money sent outward exceeds that coming inward.
- What does Current account constitute? The current account constitutes net income, interest and dividends and transfers such as foreign aid, remittances, donations among others. It is measured as a percentage of GDP.
Current Account = Trade gap + Net current transfers + Net income. abroad
- Why does Current account matter? Current account balance measures the external strength or weakness of an economy.
- A current account surplus implies the country is a net lender to the rest of the world, while a deficit indicates it is a net borrower.
- A country with rising Current Account Deficit(CAD) shows that it has become uncompetitive, and investors are not willing to invest there. They may withdraw their investments.
Importance of creating Resilient supply chains
Synopsis: The Covid-19 pandemic once again proved the importance of creating resilient supply chains that can survive the tough times.
Introduction
Creating supply chains that can withstand the disruptions is extremely important. Disruptions through the times is something inevitable as it can be manmade or natural. For example, The Tahoka Earthquake of 2011, followed by the Tsunami, led to a nuclear disaster caused a sharp drop in Japanese automobile exports to the United States.
State some examples of supply chain disruptions around the world
To avoid global disruption in the supply chain system, the robust framework is required. Causes of Supply Chain Disruption can be natural or man-made.
- Saudi Arabia’s oil refineries were attacked by terrorist drones resulting in a drop of 5.7 million barrels of oil per day. This caused a sudden fall in Saudi Arabia’s stock market and a rise in global oil prices.
- China cut off exports of rare earth to Japan after the arrest of their fishing trawler captain in 2010 near the disputed Senkakuislands by the Japanese officials.
- Coronavirus had an immediate effect on supply chains emanating from China.
- The United States government-imposed restrictions on the export of microchips to China’s biggest semiconductor manufacturer. The US felt that there was an unacceptable risk that equipment supplied to it could be used for military purposes.
How vulnerable is India to this disruption?
China has weaponised its trade and investment. Indias’ dependency on china for the following makes it vulnerable to supply chain disruption for many imp. Goods and services in the near future;
- India’s pharma sector depends on China’s Active Pharmaceutical Ingredients (APIs). It creates vulnerabilities in the value chain.
- India imports 27% of its requirement of automotive parts from China and after the pandemic it faced a huge difficulty given the sudden shortage of braking components, electrical components, interiors and lighting fixtures.
- India has an import dependency of 80%even after becoming the 4th largest market in Asia for medical devices. Among the biggest exporters to India in this field are China, the U.S., Germany, Singapore and Japan.
What are the steps taken by India and other countries to ensure SCR?
- The Supply Chain Resilience Initiative (SCRI) was started by India, japan and Australia which tends to focus on automobiles and parts, petroleum, steel, textiles, financial services and IT sectors.
- Japan aimed at diversification of investments to the Association of Southeast Asian Nations (ASEAN), India and Bangladesh.
- 89 Japanese companies availed subsidies to diversify out of China. Of these, 57 companies relocated to Japan, 30 to Southeast Asia and two to India.
- The Indian government is providing a big boost to defence manufacturing under the ‘Make in India’ programme. It has identified a negative import list of 101 items.
- Australia has demonstrated strong political will in countering uninformed Chinese sanctions imposed on its key exports of grain, beef, wine, coal and much else.
- Australia has demanded an inquiry into the origins of the coronavirus and advocated a strong Indo-Pacific vision.
Way forward
India has the capacity and the potential to become one of the world’s largest destinations for investments after the pandemic gets over.
- There is a terrific opportunity for foreign companies to enter into tie-ups with reputed Indian defence manufacturers to tap into the growing defence market in India.
- ‘AtmanirbharBharat’ is aimed at strengthening India’s capacities to participate more robustly without being prey to supply chain disruptions.
SCRI can get strengthened in the future after the involvement of France, though this might depend on the European Union’s position and the United Kingdom has also shown interest in the SCRI.
WTO rules on domestic support and food security
This article on WTO Rules on domestic support has been developed based on the Indian Express Editorial “The food security bargain”.
Context: Present World Trade Organization WTO rules are not in to support food security and rural livelihoods in India and around the world.
With the initial results of National Family Health Survey (NFHS-5) between 2015 and 2019, it has become apparent that nutrition level in India is deteriorating. In these circumstances it has become a necessity for India to further strengthen its food delivery mechanism for the poor and vulnerable sections of the society.
Read more about NFHS survey – Implications of NFHS-5 survey results
But WTO rules and their discussion are creating hurdles in furthering food security programs in India and other developing nations. Farm subsidy notification
There is widespread consensus that the World Trade Organisation (WTO) rules should provide a necessary support for food security and rural livelihoods.
Read – WTO Agreement on Agriculture
What are the issues in WTO’s rules?
WTO rules on domestic support to agriculture, at present looks tilted in favour of developed countries. In 2018, during global trade war escalation US claimed India’s market price support (MPS) was above the permitted 10 per cent limit as per ‘de minimis provision’. US Economist Franck Galtier also pointed out 3 biases in the WTO rules;
- Firstly, using external reference price” (ERP) instead of present data. WTOs External Reference Price or ERP, for calculation of market price support (MPS) limit is set at 1986-88 level, even after global price hikes of 2007-08 and 2010-11.
- Secondly, using procurement (administered) price, instead of domestic market price for calculation of support received by farmers.
Market price support for a product = (administered price at the farm gate – fixed external reference price) x eligible production |
- Third, using total production instead of actual procurement. There is no clarity on whether to country’s food grain production or the amount that has been procured by government. While India uses just the amount of grains procured by the government, US using total production of rice and wheat to raise its objections.
Other than above biases, there are other concerns of India as well.
- Fourth, US computes the MPS using the rupee as the currency while India calculates the value in dollar terms.
- Fifth, Majority of the agri. Subsidies by developed countries have been listed in the green box, as non-distorting. For Ex, 88% of farm subsidies by US has been listed in green box, resulting into increase in its farm subsidies from around $61 billion in 1995 to $139 billion in 2015.
Biswajit Dhar, professor at JNU, has rightly pointed out, “US has been subsidising its corporate agriculture to capture global markets while it targets the subsidies India gives to an overwhelmingly large share of small and marginal farmers.”
If domestic market prices are compared with international market prices using the Producer Support Estimate methodology applied by the Organisation for Economic Cooperation and Development (OECD), India’s support, turns out to be negative for the years since 2000-01.
Thus, there is a need for updating the rules so that it becomes more relevant considering the present global realities and requirements by incorporating following suggestions;
- Firstly, the reference period for price calculation should be updated to an average of 2014-16 or 2016-18 price levels.
- Secondly, support consumed by subsistence farmers themselves, instead of selling in the market MSP, should be excluded from the calculations.
- Third, India has recently pitched for a new criterions based on the “support per farmer”, instead of Aggregate Measurement of Support (AMS).
- Fourth, a differential criterion should be developed for the countries having deteriorated social and health conditions so that they do not have to choose between the health of their people and export ban on them.
With the regime change in US, there are possibilities of increasing US involvement in WTO. Thus, to make it more meaningful, its rules should be updated so that it becomes more appealing and inclusive for the countries participating in it.
WTO rulebook
Context: WTO rulebook must evolve to support food security and rural livelihoods in developing countries.
What are the existing issues related to India?
- Whether the current farm subsidy rules provide enough room for developing countries to buy food at government-set minimum support prices as part of their public stockholding programmes.
- To negotiate a permanent solution.
- India’s farm subsidy notification this year to the WTO’s committee on agriculture brought the topic of procurement under public stockholding programmes.
- It indicated that India had breached its agreed ceiling on product-specific support to rice during marketing year 2018-19.
- For example, India’s wheat support was close to breaching product-specific support ceilings, with administered prices at $263.15/tonne.
What are the underlying issues with WTO?
- Delays: many countries pursuing improved market access and closer economic integration through bilateral and regional talks.
- Paralysed dispute settlement function: Donald Trump administration’s decision to veto new appointments to the WTO’s appellate body leaving many to question the future of the rules-based multilateral trading system.
- Method of calculation: Market price support levels are calculated by taking the gap between applied administered prices and an external reference price or ERP, set at 1986-88 levels, and multiplying this by the volume of eligible production.
- Divergent views on benchmark: WTO members could usefully consider whether the fixed ERP of 1986-88 is still a relevant benchmark, especially in the wake of the global price hikes of 2007-08 and 2010-11.
- Current scenario: food security disruption caused by US-China trade tensions and the inconclusive outcome of the WTO’s 2018 ministerial conference in Buenos Aires.
How does Indian subsidies doesn’t distort market?
- India’s support turns out to be negative for the years since 2000-01, if domestic market prices are compared with international market prices using the Producer Support Estimate methodology applied by the Organisation for Economic Cooperation and Development (OECD).
- Even after accounting for input subsidies, which represent a significant share of India’s non-product-specific support using the WTO system for calculating farm support.
Way forward:
- Updating the reference prices to average 2014-16 or 2016-18 levels or using a rolling average instead flattening out volatility by excluding the highest and lowest years from a five-year period.
- Exempt support from counting towards maximum limits when administered prices are set below international market price levels.
- Members could also discount support consumed by subsistence farmers themselves from the calculation of the volume of eligible production or exempting procurement that only equates to a small share of domestic output.
- WTO members need to agree on a shared framework for action on farm subsidy reform and set a clear direction and a timeframe for reaching a rational conclusion.
- Minimise disruption in food supply chain.
- The December meeting of the General Council that is mulling over WFP food aid issues offers India (with G-20) an opportunity to demonstrate its commitment to WFP food aid and help rebuild confidence in WTO’s ability.
An agreement under WTO could also lay the groundwork for long-overdue progress on the wider trade and food security agenda at the WTO.
Why antitrust lawsuits are being filed repeatedly against tech giants like Facebook?
The issue of anti-competitive practices by Tech giants has come into the light again as recently, an antitrust lawsuit was filed by the Federal Trade Commission (FTC) and governments of 48 US states against the tech giant Facebook, accusing it of crushing smaller competitors by abusing its dominant market position. Specific instances of acquisitions of WhatsApp and Instagram by it have been cited.
In October 2020, an antitrust lawsuit was filed against Google for misusing its dominant position as a search engine for favouring its own content in search results and entering into agreements with other companies like Apple, to make it the default search engine on devices.
What are the anti-competitive activities of tech giants?
A report from top Democratic congressional lawmakers about the dominance of the four biggest tech giants-Amazon, Apple, Facebook, and Google- talks about antitrust activities by them.
Tech giants are involved in the wrong means (Like the acquisition or suppression of competition) in order to make additional profits by gaining too much power over similar businesses resulting in an unequal playing field for other business entities.
For example, Facebook recently tried to take a competitive edge over Twitter by shutting down its API access for Twitter’s short video app, Vine, and restricting its ability to grow. Tech giants resort to antitrust activities like depriving access to their platform, discriminatory advertisement policies, breaching privacy, and unlawful acquisitions.
What are the impacts of anti-competitive activities by tech Giants?
Antitrust activities are in a way anti-competitive practices that have widespread negative impacts not only on competitors but also on the users:
- For users, antitrust activities may result in the availability of fewer options and weaker privacy controls.
- After gaining a dominant position in the market, WhatsApp and Facebook eroded privacy protection by changing the terms of service. It may result in the collection of all the private data and its hoarding that is becoming the biggest source of revenues and profits. Cambridge Analytica case is one such example in which Facebook data of Indian users was ‘stolen’ to allegedly influence the elections.
- It also results in fewer choices left with the consumers for services.
- Anti-competitive practices discourage innovation in the market as it incurs additional costs in surpassing the level of giants and competing with them.
- It discourages ethical means by other tech firms as those who are sidelining it are having a competitive edge over them, in absence of proper regulations.
- A dominant position in the market may create a monopoly, leading to higher prices and low-quality services in the absence of a challenge from any other firm.
Do Anti-competitive practices exist in India?
The antitrust lawsuits filed against Tech giants are very relevant for India as well, which is the base of 400 million users of WhatsApp and the largest single market for Facebook. Amazon has around one-third of the share of online retail in India. Most smartphones in India are Android-based, dominated by Google.
India as a country with a rising industrial base is not untouched by Anti-competitive practices which got amplified after the liberalization of the Indian economy in 1991. It resulted in the formation of the Competition Commission of India in 2003. Since its inception, till 31 March 2019, the CCI has noted 1008 instances of ‘antitrust’ matters. It has imposed penalties amounting to ₹13,381 crores Over the past 10 years.
Reports suggest that anti-competitive activities have resulted in unhealthy monopolies in the Indian economy. An analysis of 2035 listed companies across 298 industry groups shows that in 33% of all industry groups, there is one single company that controls over 50% of the net sales in the sector. For example;
- Bajaj Auto dominates the scooters and three-wheeler industry.
- Tata Motors has the most significant presence in light and heavy commercial vehicles.
- Oil and Natural Gas Corp. is the country’s largest firm engaged in oil exploration.
- Facebook and Google together mop up 68%of India’s digital ad market revenues, while Amazon and Flipkart serviced 90% of all e-commerce orders during the 2019 festive season.
Conclusion:
Thus, business activities plagued by anti-trust activities not only in developed countries like the U.S but also in developing countries like India. Ensuring fair balance, data regulation, and fair digital taxation are ways forwards for the regulating agencies to deal with these activities.
In India there is a need to give more power and capacity to the largely ineffective Competition Commission of India by enacting the Draft Competition (Amendment) Bill, 2020, to deal with such activities in Indian industries.
Rise of corporate nationalism
Context: The Rise of ‘corporate nationalism’ empowers Indian companies at expense of consumers.
Instances where the Sentiments of corporate nationalism has been raised against foreign corporates?
- Amazon-Reliance Dispute: The counsel for Future Retail accused Amazon of behaving like “the East India Company of the 21st century” and calling it “Big Brother in America.”
- Whatsapp pay still pending for approval before the Supreme Court: Even though Whatsapp has obtained all requisite approvals. Multiple oppositions claim that permitting foreign entities to launch payment apps would endanger the country’s financial data. This is despite the National Payments Corporation of India’s approval of WhatsApp’s data localisation practices.
- Severe restrictions on Chinese investments: By mandating prior approval for Chinese FDI, banning several Chinese apps and restricting Chinese bidders from participating in public procurement contracts.
Why shifting the focus to the foreignness of a company for regulatory assessment is problematic?
- Foreign investors hold majority stakes in most of these “Indian” startups which make complaints of losing market share to foreign companies. For example, while complaining Amazon as a foreign company, Reliance, too, doesn’t shy away from receiving investments from Google.
- It alters the legal jurisprudence by placing the foreign identity of a party at the centre of regulatory assessments, ultimately subverting the objective of commercial laws.
- It increases the risk associated with doing business in India by creating cause uncertainty in an already chaotic legal environment.
There is no doubt that the practices of many foreign companies are suspect. Not only foreign companies, many domestic conglomerates too have equally deep pockets and more political sway than their foreign counterparts, and a questionable track record of regulatory compliance.
Indians needs to be protected from its domestic corporate giants as much as any foreign company. This can be guaranteed only if regulators and courts consciously stay true to the statutorily mandated objectives of their respective regimes.
Diversity requirements to Indian companies
Source: Click here
What are the diversity requirements that Indian companies need to meet?
News: NASDAQ stock exchange in the US may soon require all companies listed to include at least one female board member as well as one member from a racial minority group or from the LGBTQ community on their board of directors.
Facts:
- Diversity requirements Indian companies need to meet? All public companies which are listed on stock exchanges and companies with either a paid-up capital of Rs 100 crore or annual turnover over Rs 300 crore are required to have at least one woman board member under the Companies Act.
- The Securities and Exchange Board of India(SEBI) further requires, from April 1, 2020, that the top 1000 listed companies by market capitalization have a woman board member who is also an independent director.
- Level of Compliance: According to the data compiled by Institutional Investor Advisory Services(IiAS), 17% of directors in the Nifty 500 companies were women as of the end of the last fiscal with the exception of several public sector enterprises(PSEs).
Impact of the COVID-19 Pandemic on Trade and Development Report: UNCTAD
Source: Click here
News: United Nations Conference on Trade and Development(UNCTAD) has released a report titled “Impact of the COVID-19 Pandemic on Trade and Development: Transitioning to a New Normal”.
Facts:
- Aim: The report provides a comprehensive assessment of the impact of COVID-19 Pandemic on Trade and Development.
Key Takeaways.
- The global economy would contract 4.3% this year due to the pandemic. This could send an additional 130 million people into extreme poverty.
- The United Nations’ Sustainable Development Agenda 2030 will be derailed unless immediate policy actions are taken especially in favour of the poorest.
- Global poverty is also on the rise for the first time since the 1998 Asian financial crisis.In 1990, the global poverty rate was 35.9%.By 2018 it had been curtailed to 8.6% but has already inched up to 8.8% this year and will likely rise throughout 2021.
Recommendations:
- Increase the international assistance which would include offering debt relief to many poorer nations so they have the fiscal space needed to address the pandemic’s economic impacts on their populations.
- To reshape global production networks to be more green, inclusive, and sustainable while simultaneously resetting the multilateral system to support the most vulnerable and deliver on climate action.
Push for Exports
Context: India needs to shed its exaggerated fears of trade agreements to create new jobs.
What are the challenges facing by Indian economy?
- Contracting Economic growth: India is in an economic recession for the first time in its independent history.
- Rising Unemployment: Thousands of people lost their jobs due to the slowing economy in 2018-19 and 2019-20. Unemployment had reached a 45-year high. Added to this worry, more than 2 crore people lost their jobs during the lockdown.
- Rising demand for right to work: During the seven-month lockdown period, there were 11 crore people who asked for work under MGNREGA.
- Stagnating Merchandise Exports: Merchandise goods exports were $314 billion in 2013-14 and remained stagnant for the next five years touching $313 billion in 2018-19.
What are the reasons for stagnating Merchandise exports?
- Reversal in the direction of India’s foreign trade policy with higher tariffs, non-tariff barriers, quantitative limits.
- The return of licensing.
- Border country restrictions.
- The appreciating value of the rupee.
How to boost exports and produce jobs for Indian workforce?
- Investing in labour intensive sectors: Good quality jobs can be created only in sectors that are labour intensive, and where India has a comparative advantage, such as apparel, leather goods, value-added agriculture etc.
- Find more export markets: The job-creating sectors depend not only on the domestic market but, significantly, on export markets. For example, more than one-half of the leather goods and one-third of the apparel produced in India are exported to other countries.
- Encourage and Incentivise exports: Merchandise exports helps to create supporting jobs in warehousing, transport, stevedoring, container stations, shipping, ship chandling, ports and export financing.
Why India cannot persist with protectionism policy?
- Trade is reciprocal: India cannot ‘protect’ its domestic industry with high trade barriers while aspiring for bilateral trade treaties to promote exports. Also, no country will allow import of Indian goods and services unless that country is able to export its goods and services to India on reasonable and fair terms.
- FTA has Benefited its members: More winners than losers because of bilateral and multilateral trade agreements in the recent past witnessed through proliferation of FTA’s such as ASEAN, NAFTA, MERCOSUR, RCEP recently.
- To promote exports: Most manufacturing today has a long supply chain that cuts across many countries. To be able to export goods, India must import raw materials or equipment or technology from other countries in the supply chain.
What are the issues in signing FTA’s?
- FTA provisions were misused by some countries to question the foreign investment policies and tax policies of other countries.
- Purely trade and commercial disputes were dragged to international arbitral tribunals on the pretext of violating FTA provisions.
Exports are one of the main engines to revive economic growth and create many new jobs. India has the immediate opportunity to export goods worth $60 billion in labour intensive sectors which can then create lakhs of new jobs. To revive exports, India needs greater access to global markets. Hence, we must re-learn to engage with other countries and negotiate favorable trade agreements through the bilateral and multilateral routes.
Time for an Asian Century
Context: In a phase, where the west is adapting to Asian rules, RCEP will have immediate geopolitical and economic implications. India’s challenge will be in securing an ‘Atmanirbhar Bharat’ in this phase.
What is Asian centrality?
- ‘ASEAN centrality’ rejects the current frame of the West setting the agenda while allowing the West to adapt Asian rules and marking the end of the colonial phase of global history.
How Asian-led world order is emerging?
- Economic integration:
- The mega trade deal is led by ASEAN, not by China, and includes Japan and Australia, military allies of the U.S.
- The new frame goes beyond transfer of goods and services, focuses on integration and facilitating supply chains for sharing prosperity, requiring a very different calculus for assessment.
- Rise of China and India:
- Both China and India are breaking the monopoly of the West in wireless telecommunications, AI and other emerging technologies.
- India has also, in the UN, questioned Western domination calling for a “reformed multilateralism”.
- RCEP’s new rules on electronic commerce could offset losses in declining trade in goods. ‘Atmanirbhar Bharat’ will leverage indigineous technological strength, data and population.
- Declining power of west:
- Despite its military ‘pivot’ to Asia, the U.S. needs India in the Quad, to counterbalance the spread of China’s influence through land-based trade links.
- With the ASEAN ‘code of conduct’ in the South China Sea, both the security and prosperity pillars of the U.S.-led Indo-Pacific construct will be adversely impacted.
- The U.S. Congressional Research Service report identifies four key elements to strengthen its global governance:
- Global leadership.
- Defence and promotion of the liberal international order.
- Defence and promotion of freedom, democracy, and human rights; and
- Prevention of the emergence of regional hegemons in Eurasia.
What India needs to do?
- Reduce dependence: India needs a new strategic doctrine and mindset.
- Focus on technology transfer: With the Rafale aircraft purchase, India has recognised that there will be no technology transfer for capital equipment.
- Modernisation: Military Theatre Commands should be tasked with border defence giving the offensive role to cyber, missile and special forces based on endogenous capacity, effectively linking economic and military strength.
- Infrastructure development: The overriding priority should be infrastructure including electricity and fibre optic connectivity; self-reliance in semiconductors, electric batteries and solar panels; and skill development.
- Counter china: Leveraging proven digital prowess to complement the infrastructure of China’s Belt and Road Initiative will win friends as countries value multi-polarity.
- Joining RCEP: The RCEP already includes India’s priorities such as rules of origin, services and e-commerce also RCEP members have expressed their “strong will” to re-engage India, essentially to balance China.
There are compelling geopolitical and economic reasons for India in shaping the Asia-led order, which is not yet China-led, to secure an ‘Atmanirbhar Bharat.
Trade openness and globalization
Context- India’s External Affairs Minister believes that the economic growth that has accrued from globalization is not a good enough outcome for India.
What are the views of External Affairs Minister on globalization and trade pacts?
- Trade pacts and globalization have allowed other countries ‘unfair’ trade and manufacturing advantages “in the name of openness”.
- The effect of past trade agreements has been to de-industrialize some sectors.
- The consequences of future ones would lock us into global commitments, many of them not to our advantage.
- Employment challenge was created by trade.
- Trade agreements have made India over-dependent on imports.
Views of critics-
- Between 1995-2018- India’s overall export growth averaged 13.4 percent per year.
- India’s manufacturing exports (in dollars) grew on average by 12.1%, nearly twice the world average.
What are the proposed reasons for India’s slowed down exports?
- Strong rupee approach – The current government “strong rupee” approach is among the chief causes that have been shown to have slowed down exports. The real effective exchange rate has appreciated by about 20% since 2014.
- Low export competitiveness– India’s own supply side constraints and bottlenecks, i.e., its difficult regulatory environment, poor logistics quality, inadequate and inefficient trade infrastructure, and high transactions costs, among others, all of which hurt export competitiveness.
- This low ease of doing business relative to other exporting countries has further eroded the competitiveness of Indian exports.
- Policy errors– India’s share in industrial production and manufactured exports in the world economy has declined steadily in last six years, coinciding with the phase of corruption scandals, a severe banking crisis, demonetization and a badly designed GST.
How trade openness and globalization can solve these problems?
- Generating employment– Openness to trade is important to India for generating employment in the post-COVID-19 world.
- Globalization and India
- India has been one of the major beneficiaries of economic globalization — a fact attested by IMF.
- Post-1991, the Indian economy grew at a faster pace, ushering in an era of economic prosperity.
- Poverty in rural and urban India, which stood at close to 40% in 2004-05, almost halved to about 20% by 2011-12.
Way forward-
- To denounce trade openness and globalization at this point is also poor timing.
- Strong rupee policy– led to the surge in imports of goods and services preferred by non-rich Indians, and a measurable loss of competitiveness in labor-intensive exports. On the flip side, the disadvantages Indian exporters have long struggled against the substantially higher logistics remain as burdensome.
FTA’s and its significance
Context: India’s External Affairs Minister recently disapproved of free trade and globalisation.
Background:
- On November 15,15 countries of the Asia-Pacific region signed the Regional Comprehensive Economic Partnership (RCEP) agreement while India refused not to sign RCEP.
What were the rational arguments given by the government to walk away from RCEP?
- In the name of openness India has allowed subsidised products and unfair production advantages from abroad to prevail.
- An economy as attractive as India allowed the framework to be set by others.
- The effect of past free trade agreements has brought de-industrialisation in some sectors.
How good is India in emphasising trade openness?
- India is much more open economy than it was three decades ago, yet, India continues to remain relatively closed when compared to other major economies.
- According to the WTO, India’s applied most favoured nation import tariffs are 13.8%, which is the highest for any major economy.
- According to the United Nations Conference on Trade and Development, on the import restrictiveness index, India figures in the ‘very restrictive’ category.
- From 1995-2019, India has initiated anti-dumping measures 972 times (the highest in the world), to protect domestic industry.
Why FTAs are significant for Indian economy?
- Economic recovery: With trade multilateralism at the World Trade Organisation (WTO) remaining sluggish, FTAs are the gateways for international trade.
- Attract FDI: To be part of the global value chains, to enhance competitiveness, it is important to join FTAs.For example, India’s competitors such as the East Asian nations who have signed mega-FTAs are in a far superior position to be part of global value chains and attract foreign investment.
- To reproduce the past success: Economic survey 2020 concluded that India has benefitted overall from FTAs signed so far. Blaming FTAs for deindustrialisation means being ignorant to the real problem of the Indian industry which is the lack of competitiveness and absence of structural reforms.
- Globalisation not protectionism has benefitted India:
- India has been one of the major beneficiaries of economic globalisation as per International Monetary Fund (IMF).
- Post-1991, the Indian economy grew at a faster pace, ushering in an era of economic prosperity.
- According to the economist and professor, Arvind Panagariya, poverty in rural and urban India, which stood at close to 40% in 2004-05, almost halved to about 20% by 2011-12.
The Prime Minister’s desire to make India a global destination for foreign investment while following trade protectionism as the government’s official policy will not be realistic.
Lessons from Vietnam and Bangladesh
Context: Learning through the success stories of Vietnam and Bangladesh
More in News
- Bangladesh has become the second largest apparel exporter after China.
- Vietnam’s exports in apparel sector has grown by about 240% in the past eight years.
Vietnam’s success stories
- Duty free exports: Signing of Free Trade Agreements (FTAs) with important trading partners like the U.S., the EU, China, Japan, South Korea and India makes their product competitive.
- Incentives to foreign firms: Mending domestic laws to allow Foreign firms to compete for local businesses. For example, EU firms can open shops, enter the retail trade, and bid for both government and private sector tenders. They can take part in electricity, real estate, hospital, defence, and railways projects etc.
- Cheap labour: over the year’s large brands such as Samsung, Canon, Foxconn, H&M, Nike, Adidas, and IKEA have shifted to Vietnam to manufacture their products owing to reduced costs.
Bangladesh Success story
- Duty free exports: Large export of apparels to the EU and the U.S. make the most of the country’s export. The EU allows the duty-free import of apparel and other products from least developed countries (LDCs) like Bangladesh.
- Supporting large firms: Because large firms are better positioned to invest in brand building, meeting quality requirements, and marketing. Whereas Small firms begin as suppliers to large firms and eventually grow.
What are the challenges for Vietnam and Bangladesh?
- Lacks diversification: For example, Most of Vietnam’s exports happen in five sectors.
- Limited Investment sourcing: Due to Lack of developed domestic and capital market.
- Duty free markets: Bangladesh may lose its LDC status in four to seven years as its per capita income rises.
- Small gains: For example, most of Vietnam’s electronics exports are just the final assembly of goods produced elsewhere. In such cases, national exports look large, but the net dollar gain is small.
- Vulnerability: high dependence on exports brings dollars but also makes a country vulnerable to global economic uncertainty.
What are the lessons for India?
- Promote manufacturing and investment by setting up sectoral industrial zones with pre-approved factory spaces.
- Following an open trade policy, signing balanced FTAs, restricting unfair imports, and supporting a healthy mix of domestic champions and MNCs.
- While export remains a priority the focus is should be on organic economic growth through innovation and competitiveness.
- Reforms to promote innovation and lowering the cost of doing business.
Virtual Global Investor Roundtable (VGIR) for Foreign Investment in India
Context- Prime Minister has chaired the Virtual Global Investor Roundtable (VGIR), with an aim to attract investment.
What Virtual Global Investor Roundtable (VGIR) 2020 conference?
It is an exclusive dialogue between leading global institutional investors, Indian business leaders and the highest decision-makers from the Government of India and Financial Market Regulators.
- Organized by– Ministry of Finance and the National Investment and Infrastructure Fund (NIIF).
- Focus for 2020– Discussions around India’s economic and investment outlook, structural reforms and the government’s vision for the path to a USD 5 trillion economy by 2024-25.
Key highlights of the conference-
- National Infrastructure Pipeline– Under it, India has an ambitious plan to invest USD 1.5 trillion in various social and economic infrastructure projects, aimed for faster economic growth and alleviation of poverty in the country.
- India as safest investment hub– Prime minister in this conference pitched India as the ideal destination and the country offered returns with reliability, demand with democracy, stability with sustainability and growth with a green approach.
What are the challenges for revival of investment?
- Low FDI inflow in India –Contraction in investment since July-September quarter in 2019 and then the Pandemic has caused a further shock.
- Fixed investment has continues to face an uncertain outlook given the weak consumption because of the Demand shock caused by pandemic.
- Lack of funds– the government’s ability to apportion more funds for growth-spurring capital projects is hamstrung by a widening fiscal deficit amid border stand-off, the health crisis and revenue shortfall.
- The three-fourths of FDI equity inflows in 2019-20 fiscal-year being accounted by single large telecom company, a bulk of this investment is unlikely to manifest as new job-creating factories or businesses.
- Lack of policy stability – Bureaucratic procedures and corruption continue to make India less attractive to foreign investors.
- Infrastructure is also one of the issues that need to be addressed.
Possible solutions
- Assurance of stability– India needs to ensure that assurance of stability is buttressed by actions that dispel investors’ concerns over unstable policy.
How the US economy and its policy choices likely to affect India
Context: How a Biden presidency likely to benefit India’s economy
More in News
- “In a democracy, someone who fails to get elected to office can always console himself with the thought that there was something not quite fair about it”-Thucydides 431 BC.
What is the Significance of U.S to India’s Economy?
Trade:
- India enjoys a trade surplus with the U.S over the past 20 years. The trade surplus has widened from $5.2 billion in 2001-02 to $17.3 billion in 2019-20.
- Also, India accounts for nearly 5 per cent of USA’s global services import. In 2019, US imports of services from India were around $29.7 billion.
Investment:
- The US is the fifth-biggest source for Foreign Direct Investment (FDI) into India after Mauritius, Singapore, Netherlands, and Japan.
- The US also accounts for one-third of all Foreign Portfolio Investments (that is, investment in financial assets) into India. US accounted for Rs 11.21 lakh crore of FPI as of September 2020.
How the US economy and its policy choices likely to affect India?
On Trade aspects
- Biden’s administration is expected to support a strong rule-based order as well as a move away from the protectionist approach.
- Biden understands the need to control the Covid pandemic before any sustainable economic recovery. With the control of Covid infections and the economic recovery, the US could provide a growth impulse to the global economy that has benefits to countries like India to boost their exports.
- Under a Biden administration, the view that trade is a zero-sum game is likely to change.
- Also, under Biden there are chances of reconsidering the India’s exclusion from the US’ Generalized System of Preference.
- All these changes are likely to help India to get a renewed push in trade from the dip since 2017-18.
On H1B Visa
- H1-B visa issue, affects Indian youth far more than the youth of any other country.
- Visa regime was severely curtailed under Trump’s administration that favoured “America first policy”
- This could change under Biden, who is unlikely to view immigrants and workers from India with suspicion.
Better resolution on existing issues
- Data localisation, capping prices of medicines and medical devices have remained as a contentious issue between India and US.
- With Biden, moving away from radical approach to Pragmatism all these issues stand a better chance of getting towards a resolution.
Normalisation of US-Iran relationship
- US sanctions on Iran severely limited India’s sourcing of cheap crude oil.
- normalisation of US-Iran relationship leading to lifting of sanctions would benefit Indian economy which needs a regular supply of cheap oil to grow fast.
Climate change
- The US under Biden is expected to rejoin the Paris Climate Accord. This will help countries like India in dealing with, both technical and financial challenges related to climate change mitigation.
Democracy
- Civil liberties and democratic rights in India will be monitored closely an aspect to which the Trump administration largely ignored.
Money and Banking
Cryptocurrencies in India
Source: The Hindu
Syllabus: GS 3. Indian Economy and issues relating to planning, mobilization, of resources, growth, development, and employment.
Synopsis: The government should ensure a smart regulation of cryptocurrencies instead of shutting them out.
Background
The government has given a statement to bring a law on cryptocurrencies. It is a positive step. Considering the fact that there is a doubt about the legality of cryptocurrencies in India.
- The doubt exists despite the government has suggested that it does not consider cryptocurrency to be a legal tender.
- The reason behind this disapproval is that such currencies are highly volatile, used for illegal Internet transactions.
- Also, these currencies cannot be regulated as it is completely lying outside the domain of the state.
RBI’s decision on cryptocurrencies
- The RBI sent a circular to banks and asked them not to provide services for those trading in cryptocurrencies in 2018.
- However, the Supreme Court found the circular to be disproportionate. This is for the reason that virtual currencies were not banned in India.
- RBI also not able to provide strong evidence that units regulated by RBI were harmfully impacted by the exchanges dealing in virtual currencies.
What is the challenge in regulating cryptocurrencies in India?
The Minister of State for Finance Anurag Thakur highlighted the difficulty in the regulation of cryptocurrencies.
- Regulatory bodies like RBI and SEBI etc don’t have a legal framework to directly regulate cryptocurrencies.
- Cryptocurrencies are difficult to regulate as they are neither currencies nor assets or securities or commodities issued by an identifiable user.
- Cryptocurrencies have a growing client base in India despite having legal uncertainty. Their attraction may only grow now as Bitcoin has hit new peaks in price and is gaining influential followers such as Tesla founder Elon Musk.
Suggestions on cryptocurrency:
- Smart Regulation of the cryptocurrency is a much better option than getting banned directly. Because a ban on blockchain-based technology (having scattered record) cannot be implemented practically.
- For example, China has banned cryptocurrencies and has a controlled internet; even then trading in cryptocurrencies were happening in a small amount.
- The inter-ministerial committee has recommended an outright ban. On the other hand, it highlighted the need for an official digital currency and for the promotion of the underlying blockchain technology. So, the government can ban the cryptocurrency and release an official digital currency.
The way forward
The government must resist the idea of a ban and push for smart regulation.
Privatisation of banking sector: Issues and analysis
Source: The Indian Express
Syllabus: GS -3 Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment.
Synopsis: The government has decided to privatise two public sector banks. The move will give the private sector a key role in the banking sector.
Introduction
The government has announced the disinvestment policies for four strategic sectors including banking, insurance, and financial services. The government will have a bare minimum presence in these sectors.
- Earlier, the government merged ten PSU banks into four.
- The government is now left with 12 state-owned banks, from 28 earlier.
- The government will select 2 banks for privatization, based on the NITI Aayog’s recommendations. These recommendations will be considered by a core group of secretaries on disinvestment.
What were the reasons for the nationalization of Private banks?
In the Mid-1960s, the commercial banking sector was most profitable, especially after the consolidation of 566 banks in 1951 to 91 in 1967. However, some issues were present in this sectors at that time:
- Branches were mostly opened in the urban areas. Rural and semi-urban areas were not served by commercial banking.
- Banks were not willing to take any social responsibilities. They were more concerned with the profits and afraid to diversify their loan portfolios.
- Nationalisation was done with an intention to align the banking sector with a socialistic approach of the government.
Thus, from 1969, the process of nationalization of the 14 largest private banks started.
Why government is privatizing the PSBs?
However, at present, PSBs are suffering from many issues:
- First, Public Sector Banks continue to have high Non-Performing Assets and stressed assets as compared to private banks.
- Second, banks are expected to report higher NPAs and loan losses after the Covid-related regulatory relaxations are lifted. As a result, the government would need to inject funds into weak public sector banks.
- Third, Governance reforms have not been able to improve the financial position of public sector banks.
The profitability, market capitalization, and dividend payment record of PSBs are not improving, despite efforts of reform by the government.
How are the private banks performing currently?
- Private banks’ market share in loans has risen to 36% in 2020, while public sector banks’ share has fallen to 59.8% in 2020 (from 74.28% in 2015).
- They are expanding their market share through new products, technology, and better services. They have attracted better valuations in stock markets.
- For example, HDFC Bank has a market capitalization of Rs 8.80 lakh crore while SBI commands just Rs 3.50 lakh crore.
- However, everything is not well within private sector banking as well. CEOs of ICICI and Yes bank are facing the investigation for doubtful loans and other illegal activities. Lakshmi Vilas Bank merged with DBS Bank of Singapore after operational issues.
- Moreover, an Asset quality review of banks in 2015, found that many private sector banks were under-reporting NPAs.
Thus, the privatization drive this time should be thoughtful. Lessons should be learnt from the past. An adequate mechanism to ensure accountability must be established in the commercial banking sector.
Why RBI kept interest rates Unchanged?
Source- The Hindu
Syllabus- GS 2 – Government policies and interventions for development in various sectors and issues arising out of their design and implementation.
Synopsis- Monetary Policy Committee [MPC] has kept the benchmark interest rates unchanged. It is proceeding with an accommodative stance of monetary policy.
Introduction
- MPC is keeping the rates unchanged to sustain the present economic growth.
- There are many factors that are providing space to MPC for keeping an accommodative stance of monetary policy.
What are the factors behind not changing the policy rates?
- First, retail inflation has been reduced in December, below the RBI’s upper tolerance threshold of 6%.
- Second, while the economy is on the path of revival, it still needs support from every angle.
- Third, the COVID-19 vaccine and budget proposal for infrastructure are boosting confidence in the economy.
What are the concerns for growth and inflation dynamics?
- Farmer’s agitation- The agitation involves farmers from key crop-growing States including Punjab, Haryana, and U.P. is a cause for concern. Prolong agitation has the potential to disrupt farm output.
- The Centre alone borrow 12-lakh crore at the gross level in the coming financial year, the debt manager faces the difficult task.
Steps taken by the Central Bank as the government’s debt manager –
- The enhanced held-to-maturity (HTM) limit for banks was extended till March 31, 2023. The facility would be provided to the banks buying debt issued by the Centre and States.
- Allowing retail investors to buy G-Secs [government securities] directly through the Reserve Bank [Retail Direct].
Way forward-
- The vaccine campaign would boost the economic turnaround, the budget proposals and expenditure plans have raised hopes for a more robust recovery.
- The RBI needs to keep its focus over inflation as the interest rates are too low. It may boost the consumption in the near future.
LIST OF RELATED POST |
https://blog.forumias.com/currency-swap-facility/ |
https://blog.forumias.com/bad-banks/ |
Bad Banks – pros and cons
Source: The Hindu
Syllabus: GS 3 – Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment.
Synopsis: The centre is proposing to set up Bad Banks or Asset Reconstruction Company to acquire bad loans from banks.
Introduction
There is a persisting issue of bad loans in the Indian banking sector and the COVID-19 pandemic induced lockdown worsened the situation. Setting up the bad Banks will help Banking sector in dealing with this crisis.
International Experience of bad bank
- It helps in combining all bad loans of banks under a single exclusive entity. Countries like the US, Germany, and Japan have used this concept.
- The US implemented the Troubled Asset Relief Program (TARP) after the 2008 financial crisis. It was moulded around the idea of a bad bank. The US Treasury earned nominal profits under the TARP.
What are the problems with a bad bank?
According to the former RBI governor Raghuram Rajan, transferring bad assets from one pocket of the government to another will not lead to success. The reasons are,
- First, bad banks are backed by the government. The government will pay the high cost for stressed assets (to make bad bank profitable). It is not good for fiscal health of the country.
- Second, there is a bad loan crisis in PSUs because they are managed by the bureaucrats. Bureaucrats are not like private banks and cannot offer the same commitment to lenders and ensure profitability. If a Bad bank is allowed to manage by bureaucrats, then there is no point to create a bad bank at all.
- Third, bad banks do not address the root problem. The reason behind the bad loan accumulation is lack of focus on the quality of credit provided by banks. Establishing a bad bank might create a mindset that there is a system in place to recover the loans. This can lead to careless lending by banks in a larger manner and worsen the present bad loan crisis.
Will bad banks help in reviving the credit flow in the economy?
Some experts believe a bad bank can help free capital of over ₹5 lakh crore that is locked in by banks as provisions against these bad loans. This will give banks the freedom to use the freed-up money to give more loans.
- This gives the impression that banks have unused funds lying in their balance sheets. They could use these funds only if they could get rid of their bad loans.
- Many public sector banks may be considered to be technically broke. In reality, Their liabilities are far exceeding the assets they have. So, a bad bank could help them reduce their liabilities by purchasing bad loans.
The way forward
- A new bad bank set up by the government can improve banks capital safeguards by freeing up capital. It could help banks feel more confident to start lending again.
Govt. releases new guidelines for banks under “Foreign Contribution (Regulation) Act”
What is the News?
Union Home Ministry has announced new guidelines for banks, under the Foreign Contribution (Regulation) Act. These guidelines are related to the donations received by non-governmental organizations (NGOs) and associations.
What are the new FCRA guidelines?
- The donations received in Indian rupees by the NGOs and associations from any foreign source should be treated as a foreign contribution. Even if that source is located in India at the time of such donation.
- It will include the contributions by foreigners of Indian origin like OCI or PIO cardholders, in Indian rupees(INR).
- As per the existing rules, Banks need to report any receipt or utilization of any foreign contribution, by any NGO, association, or person. Banks should submit these reports to the Central government within 48 hours.
- Rules cover all NGOs, whether they are registered or granted prior permission under the FCRA.
- Any violation by the NGO or by the bank of these rules of FCRA may invite penal provisions under the FCRA Act, 2010.
Foreign Contribution (Regulation) Act:
- FCRA was enacted in 1976 and amended in 2010. It regulates foreign donations and ensures that such contributions do not adversely affect internal security.
- Coverage: It is applicable to all associations, groups, and NGOs which intend to receive foreign donations.
- Exemption: Members of the legislature and political parties, government officials, judges, and media persons are prohibited from receiving any foreign contribution.
- However, in 2017 the FCRA was amended through the Finance Bill. This amendment allowed political parties to receive funds from,
- The Indian subsidiary of a foreign company or
- A foreign company, in which an Indian holds 50% or more shares.
- However, in 2017 the FCRA was amended through the Finance Bill. This amendment allowed political parties to receive funds from,
- Registration: It is mandatory for all such NGOs to register themselves under the FCRA. The registration is initially valid for five years, and it can be renewed subsequently if they comply with all norms.
- Amendment of FCRA Rules: In September 2020, the FCRA Act was amended by Parliament and a new provision was added. It makes it mandatory for all NGOs to receive foreign funds in a designated bank account at the State Bank of India (SBI) New Delhi branch.
Source: The Hindu
Need for New 4-tier Regulations for NBFCs
Source: click here
Syllabus: GS 3
Synopsis: The RBI’s plan to tighten regulations on large NBFCs is critical for financial stability.
Introduction
The RBI has planned an important change in its regulatory approach towards India’s non-banking financial companies (NBFCs). It plans to monitor larger NBFCs almost as closely as it monitors banks.
Read – 4-tier structure for regulation of NBFCs| ForumIAS Blog
What was the need for a change in the regulatory framework?
- The size of NBFC has increased from just about 12% of banks in 2010 to a quarter of the banking sector.
- The growth has been facilitated by the lighter regulations on sourcing funds from home loans to micro-finance and large infrastructure projects.
- However, These lighter regulations revealed a systematic risk. For instance, IL&FS’s payment defaults resulted in a large scale economic crisis in 2018.
What is RBI’s proposed regulatory structure?
The RBI has introduced a four-tiered regulatory structure. By this, RBI is striking a balance between the need for low regulations and less systemic risks in the sector.
- First, For smaller NBFCs, regulations are light, on the basis of a largely ‘let it go’ approach.
- Second, For the largest NBFCs, it is imposing tougher ‘bank-like’ capitalization, governance, and monitoring norms. It is with an aim to reduce a systemic risk due to the nature of their operations.
- Third, the top tier will be activated only when a certain large player poses ‘extreme risks’. NBFC categorized in this tier will face the toughest regulations.
Way forward
- The banking sector is in despair over the past two years (PMC Bank, Yes Bank, Lakshmi Vilas Bank). Thus, a complete restart of the omission tool for NBFCs is critical to keep the confidence and maintain financial stability.
- It is hoped that the plan for the regulation of NBFCs is official soon. This would ensure the new economic recovery is not hampered by funding constraints.
4-tier structure for regulation of NBFCs
Why in News?
Reserve Bank of India (RBI) has proposed a tighter regulatory framework for non-banking financial companies (NBFCs) by creating a four-tier structure. The intensity of regulations will be greatest at the top layer and lowest at the base layer.
Objective: It is to keep the big NBFCs in good financial health. It has become important after the failure of extremely large NBFC like IL&FS.
Four Tier Structure:
Base layer: This layer will include the large number of small NBFCs in the country and will subject to the least regulation. It is because they have a limited impact on systemic stability. The proposals for this set of NBFCs include:
- Entry-level net owned funds required to be raised to Rs 20 crore from Rs 2 crore.
- NPA classification norm of 180 days will be harmonized to 90 days.
- Disclosure requirements will be widened by including disclosures on types of exposure, related party transactions, customer complaints.
Middle Layer: It will consist of NBFCs that currently fall in the ‘systemically important’ category along with deposit-taking non-bank lenders. Housing Finance Companies, Infrastructure Finance Companies, Infrastructure Debt Funds, Core Investment Companies. The proposals for this set of NBFCs include:
- It will be subjected to tighter corporate governance norms.
- No changes proposed in the capital-to-risk-assets ratio (CRAR) of 15% with a minimum Tier-I ratio of 10%.
- These NBFCs cannot provide loans to companies for buy-back of securities.
- NBFCs with 10 or more branches will be required to adopt core banking solutions.
Upper Layer: It will include about 25-30 NBFCs and will be subjected to bank-like regulation.
- It will have to implement differential standard asset provisioning and also the large exposure framework as applicable to banks.
- The concept of Core Equity Tier-1 will be introduced for this category and is proposed to be set at 9%.
- They will also be subject to a mandatory listing requirement.
Top Layer: This layer will be empty for now and will be populated with NBFCs, where the RBI may see an elevated systemic risk.
Source: Indian Express
Too Big To Fail: Domestic Systemically Important Banks (D-SIBs)
Why in News?
Reserve Bank of India(RBI) has retained SBI, ICICI and HDFC Bank in Domestic Systemically Important Banks (D-SIBs) list or banks that are considered as “Too Big To Fail”.
Facts:
- Domestic Systemically Important Banks(D-SIBs): D-SIBs are banks that are Too Big To Fail(TBTF). According to RBI, banks become D-SIBs due to their size, cross-jurisdictional activities, complexity and lack of substitute and interconnection. Banks, whose assets exceed 2% of GDP are considered part of this group.
- Significance of D-SIBs:
- Failure of such banks will result into significant disruption to the essential banking services to banking system and the overall economy.
- D-SIB tag also indicates that in case of distress, the government is expected to support these banks.
- They are also subjected to higher levels of supervision so as to prevent disruption in financial services in the event of any failure.
- D-SIB Framework: The Reserve Bank had issued the framework for dealing with D-SIBs in 2014. It requires the RBI to disclose the names of banks designated as D-SIBs starting from 2015. RBI places DSIBs in one of the 5 buckets based on their systemic importance scores(SISs).
- As part of this framework, these three banks have to maintain additional Common Equity Tier(CET) 1 compared to other commercial banks.
- CET 1: It is a component of Tier 1 capital that includes ordinary shares and retained earnings.
Article Source
Establishment of Bad Banks – associated Issues and Significance
As a result of the Covid-19 pandemic induced economic slowdown, the commercial banks are about to witness the spike in NPAs, or bad loans. To deal with it, Reserve Bank of India (RBI) Governor is considering the proposal for the creation of a bad bank.
What is a Bad Bank?
A bad bank is an asset reconstruction company (ARC), involved in management and recovery of bad loans or NPAs of other banks.
Generally, these Banks are initially funded by the government and gradually, banks and other investors start to co-invest in them.
What are the functions of Bad banks?
Commercial and Public Sector Banks (PSBs) sell their NPAs to the bad bank. The bad bank manages the NPAs/bad loans and finally recovers the money over time. The takeover of bad loans is normally below the book value of them. These banks are not involved in activities like lending and taking deposits.
For example, consider a steel plant’s loan with SBI, turned into an NPA. Bad bank purchases this NPA from the SBI. After that, the bad bank appoints domain experts to manage the assets of the plant with an aim to maximize revenues and cut losses. This is called reconstruction and increases the economic value of the plant. When the bad bank sells this plant, it will recover more money.
The first bad bank was created in 1988 by the US-based Mellon Bank. After that, a similar concept has been implemented in other countries including Finland, Sweden, France and Germany.
Concept of Bad bank in India:
- The idea gained momentum when the RBI held asset quality review (AQR) found several banks showing a healthy balance sheet but have suppressed or hidden bad loans.
- Sunil Mehta panel on NPA’s (Non-Performing Assets) proposed Sashakt India Asset Management company, for resolving large bad loans in 2018.
- The Bad bank proposal was also discussed during the Financial Stability and Development Council (FSDC) meeting, but the government preferred a market-led resolution process instead of a bad bank.
Difference between Bad Bank and ARC (Asset Reconstruction Company):
Bad Bank | Asset Reconstruction Company |
A bad bank is simply a corporate structure that isolates liquidity and high-risk assets held by a bank or a financial organisation, or perhaps a group of such lenders. | ARCs are registered with RBI under Section-3 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. |
Bad Banks if established can take over all types of stressed assets | ARCs will only buy those pools of stressed assets if they see business-viability of those pools. |
Currently the Bad banks are at conceptual stage and yet to be materialized | Currently, there are many licensed ARCs in India |
Why a bad bank is required?
First, Banks have difficulty in solving these cases due to lack of expertise, coordination, capital etc. Even the private ARCs have also failed to recover the loans.
Second, The RBI fears a spike in bad loans after the Covid-19 pandemic and the six-month moratorium announced to tackle the economic slowdown. This creates a necessity of Bad banks.
Third, the panel led by KV Kamath, has said companies in sectors such as wholesale trade, retail trade, textiles and roads are facing stress. So, setting up a bad bank is crucial to revive these sectors.
Fourth, Bad banks are targeted banking system with domain experts to focus particularly on NPAs Bad banks can be more effective, quicker in restructuring of the loans.
The Financial Stability Report points that the gross NPAs of the banking sector are expected to shoot up to 13.5% of advances by September 2021, from 7.5% in September 2020, under the baseline scenario. So, the Bad banks are essential considering the Indian conditions.
Advantages of having Bad bank:
First, Bad banks will improve credit mobilization culture in the economy: By holding the defaulters accountable the Bad Banks will ensure the accountability of borrower to pay the loan at any cost.
Second, Bad Banks will improve monetary Policy Transmission. NPAs were one of the major reasons for the lack of monetary policy transmission (MPT) in India. Even though RBI has reduced policy rates, Banks don’t reduce lending rates, to recover the cost of NPAs with them. If bad banks can manage their NPAs, their financial health will improve and facilitate MPT in the economy.
Third, Bad Banks can take bold decisions compare to commercial Banks. In General, the price at which NPAs are sold comes under the preview of CVC, CBI and CAG. Banks were hesitant to reveal and disposal of stressed assets fearing adverse reports by these institutions. A bad bank that can maximize recovery due to professionalism and hence will be less hesitant.
Fourth, Higher prices for stressed assets can be realized by bad banks.
Challenges associated with bad banks:
First, the major challenge associated with the Bad bank’s establishment is regarding what kind of loans will be taken over by bad banks, and at what cost? This is aggravated when the commercial banks were reluctant in the past for haircuts. If a PSB accept the NPA sale at lower price to Bad Bank then that loss is incurred by that PSB (I.e., the government)
Second, the stake of government in Bad bank is criticised for political influence in decision making. Especially when the majority of the NPAs are associated with the Public Sector Unit.
Third, the establishment of bad banks may not incentivise banks to focus on the quality of credit provided, monitor loans, and protect against ever-greening of loans. Banks might perform lending activities in the mindset that there is a system in place for recovering the loans.
Fourth, larger systemic issues will not be addressed. A bad bank does not address the structural weaknesses in public sector banks such as management etc.
For these reasons, many economists including the former RBI Governor opposed the establishment of Bad Bank in India.
Solutions:
First, laying out a clear road map for Bad Bank is crucial. Government can address the issue in the upcoming budget session.
Second, Exploring the models suggested by former RBI Deputy Governor, Viral Acharya. He suggested two types of Bad banks. The possibility of these two models can be explored before setting up of Bad Bank. The models were:
- Private Asset Management Company (PAMC)– This model is suitable for stressed sectors where the assets are likely to have an economic value in the short run, with moderate levels of debt forgiveness.
- National Asset Management Company (NAMC)– This is for the sectors where the NPA problem is in excess capacity and also of economically unviable assets in the short to medium terms.
The government can roll out the Bad Bank for the PAMC to instil public confidence and assess the performance of Bad banks and later can extended to NAMC category.
Third, K V Kamath Committee also suggested to set up Bad bank to revive sectors such as Trade, Textile, NBFCs, Steel and construction, etc.
Way forward:
The Problem of NPA is huge in India. Without reducing the problem of NPA India cannot become a trillion-dollar economy. The UK Asset Resolution (UKAR), a bad bank has recovered nearly 50 billion pounds of loans in UK. So, the Bad Banks is key to reduce the NPA’s, and it is high time for India to follow the path.
Important Concepts
NPAs: A loan whose interest and/or instalment of principal have remained ‘overdue ‘(not paid) for a period of 90 days is considered as NPA.
Stressed assets = NPAs + Restructured loans + Written off assets
Restructured asset or loan: These are assets which got an extended repayment period, reduced interest rate, converting a part of the loan into equity, providing additional financing, or some combination of these measures
Written off assets: These are assets which the bank or lender doesn’t count the money the borrower owes to it. The existing shareholders face a total loss on their investments unless there are buyers in the secondary market who may ascribe some value to these.
RBI constituted Jayant Kumar Dash committee to study Digital lending activities
News: Reserve Bank of India(RBI) has constituted a working group on digital lending — including online platforms and mobile apps.
Facts:
- Objective: The working group will study digital lending activities in the regulated and unregulated financial sector so that an appropriate regulatory approach can be put in place.
- Composition: The working group comprises six members–four will be from within the RBI and the remaining will be external. Jayant Kumar Dash, executive director at the RBI will head the group that has been advised to submit its report within three months.
- Terms of Reference of the Digital Lending Working Group:
- Evaluation of digital lending activities and assessing the penetration and standards of outsourced digital lending activities in RBI regulated entities.
- Identifying risks posed by unregulated digital lending to financial stability, regulated entities and consumers.
- Suggesting regulatory changes, if any, to promote orderly growth of digital lending.
- Recommending measures, if any, for expansion of specific regulatory or statutory perimeter and suggesting the role of various regulatory and government agencies.
- Recommending a robust fair practices code for digital lending players Suggesting measures for enhanced consumer protection.
- Recommending measures for robust data governance, data privacy and data security standards for deployment of digital lending services.
RBI unveils guidelines for Payment Infrastructure Development Fund
News: Reserve Bank of India(RBI) has announced operational guidelines for the Payments Infrastructure Development Fund (PIDF) scheme.
Facts:
- Objectives of the Fund:
- To increase the number of acceptance devices multi-fold in the country.
- To benefit the acquiring banks / non-banks and merchants by lowering overall acceptance infrastructure cost.
- To increase payments acceptance infrastructure by adding 30 lakh touch points – 10 lakhs physical and 20 lakh digital payment acceptance devices every year.
- Purpose: The fund will be used to subsidize banks and non-banks for deploying payment infrastructure which will be contingent upon specific targets being achieved.
- Accountability: Acquirers of the subsidy shall submit quarterly reports on the achievement of targets to the RBI.
- Targets:
- The primary focus shall be to create payment acceptance infrastructure in Tier-3 to Tier-6 centres.
- North Eastern states of the country shall be given special focus.
- The fund will also focus on those merchants who are yet to be terminalised(merchants who do not have any payment acceptance device).
- Merchants engaged in services such as transport and hospitality, government payments, public distribution system(PDS) shops, healthcare may be included especially in targeted geographies.
- Duration of Fund: The fund will be operational for three years effective from 1st January, 2021 and may be extended for two more years.
- Funding::It has a corpus of Rs. 345 crore with Rs. 250 crore contributed by the RBI and Rs. 95 crore by the major authorised card networks in the country. The authorised card networks shall contribute in all Rs. 100 crore. Besides the initial corpus, PIDF shall also receive annual contributions from card networks and card issuing banks.
- Advisory Council: An Advisory Council (AC) under the chairmanship of RBI deputy governor BP Kanungo has been constituted for managing the PIDF. The council will devise a transparent mechanism for allocation of targets to acquiring banks and non-banks in different segments and locations.
- Monitoring: Implementation of targets under PIDF shall be monitored by RBI’s Regional Office Mumbai with assistance from card networks, the Indian Banks’ Association, and the Payments Council of India.
Digital technology worsen financial exclusion in rural India
Synopsis- Internet Services’ base payment system is worsening the financial exclusion prevalent in rural India.
Introduction Financial Exclusion in rural India
Internet services have provided much comfort to the user. But for the majority of the rural population digital technology has become troublesome due to a lack of technical knowledge and nexus of service providers, middlemen, government officials, and others.
We need to find solutions so that the fruits of digital technology will be borne by all the rural population.
Introduction of the digital payment based solution in rural India
- Direct Benefits Transfer (DBT) was launched with an aim of improving financial inclusion in 2011. Since 2015, it has become synonymous with the Aadhaar Payments Bridge Systems (APBS).
- Money is transferred to the various beneficiaries of programs under DBT such as maternity entitlements, student scholarships, and wages for MGNREGA.
- To deal with the “last mile challenges” facing beneficiaries in accessing their money; banking kiosks, known as Customer Service Points (CSP) and Banking Correspondents (BC), were promoted.
- These are private individuals who offer banking services through the Aadhaar Enabled Payment Systems (AePS).
- At these kiosks, beneficiaries can perform basic banking transactions such as small deposits and withdrawals.
However, it doesn’t solve the basic issues that are being faced by the lower strata of the rural areas in receiving their own money from their bank accounts.
What are the issues faced by rural population in acessing their payments?
The process of transition from older payment systems and the APBS technology needs to be scrutinised which impact all DBT programmes.
- Lack of technical knowledge– Workers have little clue about where their wages have been credited and what to do when their payments get rejected, often due to technical reasons such as incorrect account numbers and incorrect Aadhaar mapping with bank accounts.
- Lack of accountability– State governments have not set any accountability for APBS and AePS/payment intermediaries and there is no grievance redressal mechanism for the same.
- Lack of consultation– The workers/beneficiaries have rarely been consulted regarding their preferred mode of transacting.
- Creation of new forms of corruption – All the above factors have resulted into new form of corruption. For Example; Massive scholarship scam took place in Jharkhand, where many poor students were deprived of their scholarships owing to a nexus of middlemen, government officials, banking correspondents and others.
Findings of the new report by LibTech India
LibTech India recently released a research report based on a survey of nearly 2,000 MGNREGA workers across Andhra Pradesh, Jharkhand, and Rajasthan. The survey explains the experiences of workers in obtaining wages in hand after they were credited to their bank accounts.
- Access to wages from banks becomes arduous– Rural banks are short-staffed and tend to get overcrowded. Hence, it requires more hours and multiple visits to access wages from banks.
- Technical issues– CSP/BCs appeared to be a convenient alternative to banks due to their proximity. However, an estimated 40 per cent of them had to make multiple visits to withdraw from CSPs/BCs due to biometric failures.
- Too much travel cost is involved – To get their DBT share, MGNREGA workers need to spend too much for travel leading in addition to loss of their daily wage on the day of travel. E.g. the average travel cost for one visit to a bank in Jharkhand is Rs 50 which becomes Rs 100 for two bank visits.
- Passbook related issues– The only way for rural bank users to keep track of their finances is through their bank passbooks. However, more than two-thirds of time workers were denied the facility to update their passbooks at banks, some workers are even charged (45 per cent in Jharkhand) for this free service by CSPs/BCs.
Way forward
The right to access your own money in a timely and transparent manner is a basic right of every individual that must be protected by the government at any cost.
- There are just 14.6 bank branches per 1 lakh adults in India. This is sparser in rural India. Despite the hardships of access, most workers preferred to transact at the banks. Hence Branch expansion into rural unbanked locations will significantly reduce poverty.
- The technological solutions must be coupled with a governance structure, in which protection of rights and choices of individuals must be fundamental.
Read Also :MAINS QUESTION BANK AND ANSWERS for UPSC
Report on Trend and Progress of Banking in India 2019-20
News: Reserve Bank of India has released the Report on Trend and Progress of Banking in India 2019-20.
Facts:
- About the report: The report is a statutory publication in compliance with Section 36 (2) of the Banking Regulation Act, 1949.
- Purpose: It presents the performance of the banking sector, including co-operative banks, and non-banking financial institutions during 2019-20 and 2020-21 so far.
Key Takeaways:
- Decline in NPAs: Scheduled Commercial Banks(SCBs) gross non-performing assets (GNPA) ratio declined from 9.1% at end-March 2019 to 8.2% at end-March 2020 and further to 7.5% at end-September 2020.
- Strengthened CRAR Ratio: Capital to risk weighted assets (CRAR) ratio of SCBs strengthened from 14.3% at end-March 2019 to 14.7% at end-March 2020 and further to 15.8% at end-September 2020 partly aided by recapitalisation of public sector banks and capital raising from the market by both public and private sector banks.
- Policy Measures: The Reserve Bank also undertook an array of policy measures to mitigate the effects of COVID-19; its regulatory ambit was reinforced by legislative amendments giving it greater powers over co-operative banks, non-banking financial companies (NBFCs), and housing finance companies (HFCs).
- Decline in UCBs Balance Sheet: The balance sheet growth of Urban Co-operative Banks(UCBs) moderated in 2019-20 on lower deposit accretion and muted expansion in credit; while their asset quality deteriorated, increased provisioning resulted in net losses.
- NBFCs: The consolidated balance sheet of NBFCs decelerated in 2019-20 due to near stagnant growth in loans and advances although some improvement became visible.
- Frauds in Banks: The number of frauds reported by banks in April-September 2020 period declined to Rs 64,681 crore from Rs 1,13,374 crore reported in the same period of the previous year.
RBI launches Digital payments index to track transactions
News: Reserve Bank of India(RBI) has launched a composite Digital Payments Index(DPI).
Facts:
- Objective: To capture the extent of digitisation of payments across the country given the sharp pick-up in digital transactions seen in the recent past.
- Parameters: The index comprises five broad parameters with varying weights to measure the penetration of digital payments.The five key parameters include:
- Payment enablers (25%).
- Payment infrastructure—demand-side factors (10%).
- Payment infrastructure—supply-side factors (15%).
- Payment performance (45%).
- Consumer centricity (5%).
- These factors include multiple sub-parameters that would help the regulator conduct its study into the digital payment ecosystem.
- Duration of Releasing Index: The index shall be published on RBI’s website on a semi-annual basis from March 2021 onwards with a lag of 4 months.
- Base Year: The index has been constructed with March 2018 as the base period.At a base of 100 for March 2018, the RBI has measured that the index rose to 153.47 and 207.84 in 2019 and 2020 respectively.
Read Also:-CURRENT AFFAIRS 2020-2021
What is Positive Pay Mechanism?
Source: The Indian Express
News: From January 1, 2021, the Reserve Bank of India (RBI) will introduce the ‘Positive Pay System’ for cheque transactions above Rs 50,000 in a bid to enhance safety and eliminate frauds.
Facts:
- Positive Pay Mechanism: It involves a process of reconfirming key details of large-value cheques.
- Process: Under this, the issuer of the cheque submits electronically through channels like SMS, mobile app and Internet banking, certain minimum details of cheque to the drawee bank, details of which are cross-checked with the presented cheque by Cheque Truncation System(CTS).Any discrepancy is flagged by CTS to the drawee bank and presenting bank who then take redressal measures.
- Cheque Limits: Banks will enable the new system for all account holders issuing cheques for amounts of Rs 50,000 and above.It is mandatory in case of cheques for amounts of Rs 5,00,000 and above.
- Developed by: National Payments Corporation of India (NPCI) will develop the facility of Positive Pay in CTS and make it available to participant banks.
RBI allows RRBs to access LAF, MSF windows
Source: Click here
News: Reserve Bank of India(RBI) has allowed regional rural banks (RRBs) to access the liquidity adjustment facility(LAF), marginal standing facility(MSF) and call or notice money markets with the aim to facilitate better liquidity management for these lenders.
Facts:
- Liquidity Adjustment Facility(LAF): It is a facility extended by the Reserve Bank of India to the banks to avail liquidity in case of requirement or park excess funds with the RBI in case of excess liquidity on an overnight basis against the collateral of Government securities including State Government securities.
- Marginal standing facility(MSF): It is a window for banks to borrow from the Reserve Bank of India in an emergency situation when interbank liquidity dries up completely.MSF rate is generally higher than Repo rate.
- Call or Notice Market: The call/notice money market forms an important segment of the Indian Money Market.Under call money market, funds are transacted on an overnight basis and under notice money market funds are transacted for a period between 2 days and 14 days.
Additional Facts:
- Regional Rural Banks: These are financial institutions which ensure adequate credit for agriculture and other rural sectors.They were set up on the basis of the recommendations of the Narasimham Working Group (1975), and after the legislation of the Regional Rural Banks Act, 1976.
- First RRB: The first Regional Rural Bank “Prathama Grameen Bank” was set up on 2nd October, 1975.
- Stakeholders: The equity of a regional rural bank is held by the Central Government, concerned State Government and the Sponsor Bank in the proportion of 50:15:35.
- PSL: The RRBs are required to provide 75% of their total credit as priority sector lending(PSL).
India Post Payments Bank launches its digital payments services ‘DakPay’
Source: Click here
News: Department of Posts (DoP) and India Post Payments Bank(IPPB) has unveiled a new digital payment app ‘DakPay’.
Facts:
- DakPay: To facilitate easy digital transactions and other banking services through the trusted Postal (‘Dak’) network across the nation to cater to the financial needs(‘Pay’) of various sections of the society.
- Significance: The App is launched as part of its ongoing efforts to provide Digital Financial inclusion at the last mile across India.
Additional Facts:
- India Post Payments Bank(IPPB): It has been established in 2018;under the Department of Posts, Ministry of Communication with 100% equity owned by Government of India.
- Mandate: To remove barriers for the unbanked & underbanked and reach the last mile leveraging the Postal network.
Farm and Banking Reform
Context: There is some risk necessary to reform Banking and Agriculture sectors.
What are the recently announced reforms in Farming and Banking sector?
- The three farm bills legislated by the government recently, which are in the early stages of implementation.
- The second is a proposal by RBI to let corporates/industry own banks.
Can MSP ensure farm income and Agri-growth?
- No guarantee of income: Farmers don’t get a remunerative price for their products, with the exception of a minority whose produce, mostly wheat and rice, is covered by the Minimum Support Price policy.
- Prevalence of middlemen: Most farmers toil on tiny, suboptimal acreage and have no bargaining power vis-vis the APMC middlemen. Choice in buyers gives them some leeway to bargain for a better price.
- MSP is not a guarantee: even those who get MSP are suffering from a fast depletion of the water table.
- Excessive use of pesticides/fertilisers due to faulty policy: the high prevalence of cancer in rural parts of Punjab and a higher cost of other foods like vegetables and fruits which are in short supply since everyone who can is planting MSP crops.
- Post-harvest loss: every year a lot of wheat and rice rots in the Food Corporation of India’s limited warehouses.
What do the laws propose to do?
- End the monopoly of APMC mandis where farmers had to compulsorily sell their produce.
- End limits on stock-keeping and allow contract farming by the private sector.
What is immediate response of common people?
- The new farm laws have brought the farmers of Punjab and other parts of north India to the streets of Delhi.
- The volume of protest tells us that some of us are afraid of change and unable to see what may be good for all of us a decade from now.
- Farmers will no longer get a remunerative price for their produce
How future will be different for Agriculture?
- Growth in demand for non-cereal foods, like vegetables, fruits and proteins will outstrip demand for cereals.
- Remunerative price for farmers cannot be at the expense of rampant food inflation for the consumer.
What can be the possible consequences if industries house own banks?
- It will channel lending from that bank to its own business at the expense of better, more efficient fund allocation.
- It will be much easier for regulators to track any lending to connected entities than it is for them to track the unofficial connectedness, which has led to the NPA problem.
What is the way ahead?
- Balance the interests of farmers and consumers.
- Bring policy change as the farm reforms are already 10 years late.
- Industry houses are the most obvious source of domestic capital to build such banks.
India and UN-Based Better Than Cash Alliance organizes learning on fintech solutions
Source: Click here
News: India and UN-Based Better Than Cash Alliance organized a joint Peer learning exchange on fintech solutions for responsible digital payments at the last mile.
Facts:
- Better Than Cash Alliance: It was created in 2012 as a partnership of governments, companies and international organizations that accelerates the transition from cash to responsible digital payments.
- Launched by: It was launched by the United Nations Capital Development Fund, the United States Agency for International Development, the Bill & Melinda Gates Foundation, Citigroup, the Ford Foundation, the Omidyar Network and Visa Inc..
- Members: The Alliance has 75 members which are committed to digitizing payments.
- Objectives: The Alliance Secretariat works with members on their journey to digitize payments by:
- Providing advisory services based on their priorities.
- Sharing action-oriented research and fostering peer learning on responsible practices.
- Conducting advocacy at national, regional and global level.
Why Corporate houses should not own banks?
Context: Granting license to corporates to promote banks will be disastrous to the economy as a whole.
Background
- Recently, the RBI constituted an Internal Working Group to determine if large corporate houses can be given licence to promote banks.
- The Internal Working Group recommended to allow corporate houses to operate banks.
What are the concerns associated with this move?
- Experts caution: Former RBI Governor Raghuram Rajan and former RBI Deputy Governor Viral Acharya opined that the recommendations for allowing corporates into banking a “bombshell” and said this proposal needs to be dropped.
- Issue of connected Lending: Business houses owning an in-house bank may lead to self-lending.
- Issue of Credit Quality: Banks cannot make good loans when it is owned by the borrower. Even under the existing financial regime, the RBI was unable to detect at an early stage the connected lending which felled large regulated financial entities like IL&FS, Yes Bank (Rana Kapoor and his entities held 10.6% as on end September 2018), DHFL (promoter holding 39%).
- Growth of monopoly market: India’s business landscape is already starting to resemble a Monopoly board for example, telecommunications and transportation. Allowing corporates to own banks will strengthen this process.
What are the arguments given by RBI’s Internal Working Group in support of giving corporates licence to promote banks?
- Making necessary amendments to the Banking Regulation Act of 1949 to deal with connected lending and linkages between banks and non-financial group entities.
- Strengthening the supervisory mechanism for conglomerates. These measures will be able to regulate corporate owned banks effectively.
What is the way forward?
- The way forward should be to privatise public sector banks by allowing wide and diversified holding of stock by the general public.
- If the government exits banking ownership, it would lead to professional management and broader distribution of wealth. The banks would come under both SEBI and stringent RBI guidelines.
Permitting industrial houses to own banks
Context: Permitting industrial houses to own banks could undermine economic growth and democracy.
Background
- Recently, an internal working group of the RBI has made a far-reaching recommendation to permit industrial houses to own and control banks.
- According to the report, the reason for permitting industrial houses to own and control banks is that industry-owned banks would increase the supply of credit, which is low and growing slowly.
- However, many believe that this step would be a grievous mistake, and it will be a setback to Indian economic and political development.
Why it is a concern?
- Against the recommendations of the experts: The report states that majority of the experts were of the opinion that large corporate/industrial houses should not be allowed to promote a bank.
- The problem of connected lending: This can lead to Over-financing of risky activities, encouraging inefficiency by delaying or prolonging exit and entrenching dominance.
- Regulation of Connected lending is difficult: It is clear from the experience of Indonesia and most advanced countries that regulating connected lending is impossible and the only solution is to ban corporate-owned banks.
- Overburdened RBI: RBI has encountered much difficulty in dealing with banking irregularities at Punjab National Bank, Yes Bank, ILFS and Lakshmi Vilas Bank. Regulation and supervision need to be strengthened considerably to deal with the current problems in the banking system before they are burdened with new regulatory tasks.
- Can delay exiting of inefficient firms: This makes it impossible for more efficient firms to grow and replace them. If industrial houses get direct access to financial resources, their capacity to delay or prevent exit altogether will only increase.
- Can stimulate growth of Monopolies: Already, The Indian economy already suffers from over-concentration. The COVID-19 crisis is aggravating this picture because those with greater resources will not only more easily survive the crisis and they will be able to take over small, medium and large enterprises that have not had the resilience or resources. In this scenario, if large industrial houses get banking licences, they will become even more powerful.
- Will dampen rules-based well-regulated market economy: The power acquired by getting banking licences will not just make them stronger than commercial rivals, but even relative to the regulators and government itself. This will aggravate imbalances leading to a vicious cycle of dominance.
- Affect credit Quality: Indian financial sector reforms have aimed at improving both the quantity and the quality of credit. If India now starts granting banking licences to powerful, politically connected industrial houses, allowing them to determine how credit is allocated, it will effectively abandon the principle of ensuring that credit flows to the most economically efficient users.
- Alternative options do exist: The other powerful way to promote more good quality credit is to undertake serious reforms of the public sector banks.
Mixing industry and finance will set us on a road full of dangers for growth, public finances, and the future of the country itself.
Corporates as Bankers: Bane or boon for economy?
A recent report by an Internal Working Group (IWG) of the Reserve Bank of India has attracted a lot of attention as well as criticism for its recommendations including the one that suggests corporate houses be given bank licences.
Rationale to constitute IWG by RBI:
The IWG was constituted to “review extant ownership guidelines and corporate structure for Indian private sector banks” for important reasons like
- The total balance sheet of banks in India still constitutes less than 70 per cent of the GDP, which is much less compared to global peers such as China, where this ratio is closer to 175%.
- The domestic bank credit to the private sector is just 50% of GDP. But in economies such as China, Japan, the US and Korea it is upwards of 150 per cent.
- India’s banking system has been struggling to meet the credit demands of a growing economy.
There is only one Indian bank in the top 100 banks globally by size. Further, Indian banks are also one of the least cost-efficient. So, RBI Constituted a IWG to look into the ownership guidelines and corporate structure for Indian private banks.
The committee submitted its report last week.
key recommendations of the IWG: · The cap on promoters’ stake in the long run (15 years) may be raised from the current level of 15 per cent to 26 per cent of the paid-up voting equity share capital of the bank. · Large corporate/industrial houses may be allowed as promoters of banks only after necessary amendments to the Banking Regulation Act, 1949 · Well run large Non-banking Financial Companies (NBFCs), with an asset size of ₹50,000 crores and above, may be considered for conversion into banks subject to completion of 10 years of operations and additional conditions prescribed. · Payments Banks can be allowed to convert to a Small Finance Bank, after 3 years of experience as Payments Bank. · Reserve Bank may take steps to ensure harmonisation and uniformity in different licensing guidelines, to the extent possible. |
Positives of committee report:
For Banking Sector:
- Dilute the Impact of COVID pandemic: The reforms can Fast track the credit disbursment and distribution to businesses in short term to revive the economy, impacted by the COVID Pandemic.
- Transformation of banking sector in India: If implemented the banks can help in India’s ambition to be a trillion-dollar economy by acceleration of credit to MSME Sector that will also compliment Atmanirbhar Bharat mission.
- Bank for all: In rural India Co-operatives is still the major banker with no other alternative. If payments banks are allowed to convert in to small finance banks, this could potentially increase competition, especially in the micro lending space, leading to increasing efficiency.
- Ensuring robust banking system in India: Since India has very less banks in present, even a smallest bank failure is causing ripples in the entire banking system. To avoid such every time RBI and Government is stepping in to rescue. This can be avoided if recommendations are implemented.
- Can get rid of NPA’s in the long run: The reforms can create a ripple effect and reduce India’s one of long-standing problem in the banking sector. Opening up of more banks will ensure that the underperforming banks either amalgamated or weed out in the long run.
- Digital banking is feasible: At present due to less competition and capital,banks are investing less in the technology in terms of payment, credit behaviour etc. Reforms can ensure private invest in technology and push the Public Sector Banks also.
- Corporate houses will bring capital and expertise to banking.
- Government can focus on other problems instead of rescuing banks frequently with taxpayer’s money. Apart from that Government finances were already strained before the Covid crisis and worsened during the pandemic.
Why the corporate as a promoter of bank being criticized?
One of the most severe criticisms of the report was the recommendation of allowing the large corporate/industrial houses as a promoter of banks. Former RBI Governor Raghuram Rajan and former RBI Deputy Governor Viral Acharya severely criticised the suggestion for various reasons like,
- Poor governance under the present structure is the major problem of Indian banking sector. Ex Despite spotting the fault at early stage in IL&FS, RBI did not step up its governance activities and that resulted in the defaulting of the IL&FS.
- Bank for elites: In the past, Banks were nationalized because they ownership by the private sector was leading to “large concentration of resources in the hands of a few business families”. The allowing of corporate might revive that.
- Financial crisis in India: 2008 Global Financial crisis was a proof of how risky that the private sector banks are? Trusting them to operate at large scale instead of trust worthy and financially stable government-owned banking system might create a financial crisis in long run.
- Issue of Connected Lending: 1997 Asian Financial Crisis was a grave example of mingling of big companies and banks. If we allow corporate as a promoter of banks then the connected lending consequence is unavoidable in India.IWG report itself mentions, “it will be difficult to ring fence the non-financial activities of the promoters with that of the bank”.
Connected Lending: connected lending refers to a situation where the promoter of a bank is also a borrower. There is a possibility promoter to channel the depositors money into their own ventures. Connected lending was the key factor behind 1997 Asian Financial crisis.
The recent episodes in ICICI Bank, Yes Bank, DHFL etc. were all examples of connected lending. |
- Inadequate to track: Corporate houses are adept at routing funds through a maze of entities in India and abroad. So, they can bypass the checks and balances and flout the norms.
- Can Increase Crony Capitalism: There is a high possibility that few corporates control the lending process and influence the lending process. Thereby reduce the competition and can create a Chakravyuhatype of challenge in Indian Economy.
Is Corporate as Banks is new to India?
In February 2013, the RBI had issued guidelines that permitted corporate and industrial houses to apply for a banking licence. Some houses applied, although a few withdrew thei rapplications subsequently.
Only two entities qualified for a licence, IDFC and Bandhan Financial Services. No corporate was ultimately given a bank licence.
The RBI maintained that it was open to letting in corporate companies to open banks. However, none of the applicants had met ‘fit and proper’ criteria.
In 2014, the RBI restored the prohibition on the entry of corporate houses into banking
Solutions:
- Improve private governance and regulatory capacity:The Committee on Financial Sector Reforms (2008) headed by then RBI Governor observed that it is premature to allow industrial houses to own banks. Though necessary,the reform can wait till private governance and regulatory capacities improve.
- Regulator side:
- Regulator has to enhance the credibility of the system by ensuring every deposit is safe especially with better governance.
- RBI should ensure the checks and balances before allowing corporates to become promoters.
- Instead of debating with the allowing of corporate is good or bad? RBI can move ahead with the other recommendations which are really beneficial for the banking sector and economy as whole.
- From Government side
- Better Legal framework: If permitting corporates as bank promoters than the government not only need to amend the Banking Regulation Act, 1949 but also needs to amend various Acts to curb crony capitalism, liberal whistle blowing policies etc., but they all need strong political commitment.
Way forward:
Though allowing corporate is one of the recommendations of IWG report, there are many other necessary recommendations for reforming the banking sector. RBI needs to reconsider the step to allow corporates, as the report is open for public review till January.
corporate houses in Indian banking
Context: Recently, an Internal Working Group of the Reserve Bank of India (RBI) has recommended that corporate houses be given bank licences.
Background
- Earlier, in 2013, the RBI had issued similar guidelines permitting corporate and industrial houses to apply for a banking licence. However, no corporate was given a bank licence as none of the applicants had met ‘fit and proper’ criteria.
- In 2014, the RBI, reversed its earlier decision and prohibited the entry of corporate houses into banking based upon the Committee on Financial Sector Reforms (2008) suggestion that opined it is premature to allow industrial houses to own banks.
- Now, an Internal Working Group of the Reserve Bank of India (RBI) has once again recommended for providing bank licences to corporate houses.
What are the Pros and Cons of letting corporate houses to operate banks?
Pros:
- Corporate houses will bring capital and expertise to banking.
- In many countries corporate houses were not bared from banking.
Cons
- Interconnected lending: They can use banks to provide finance to customers and suppliers of their businesses.
- Concentration of economic power.
- Exposure of the safety net provided to banks to commercial sectors of the economy.
- Fund diversification: by turning banks into a source of funds for their own businesses.
- Impact of Non entities on banks growth: Banks owned by corporate houses will be exposed to the risks of the non-bank entities of the group.
- Privatisation of Public banks in the long run: For example, Public sector banks need capital that the government is unable to provide. The entry of corporate houses will result in the possibility of cash rich corporate bank acquiring cash trapped public sector banks which is a serious concern about financial stability.
Why Tracing interconnected lending will be a challenge?
- The Internal Working Group suggests that, before corporate houses are allowed to enter banking, the RBI must be equipped with a legal framework to deal with interconnected lending and a mechanism to effectively supervise conglomerates that venture into banking.
However, there are challenges while dealing with interconnected lending.
- Multi sector cooperation required: Monitoring of transactions of corporate houses will require the cooperation of various law enforcement agencies.
- Crony capitalism: Corporate houses can use their political clout to thwart such cooperation.
- No prevention possible: The RBI can only react to interconnected lending ex-post; it will not be able to prevent such exposure.
- Complex process: In case, even if RBI could trace interconnected lending, any action taken on corporate will only cause a flight of deposits from the bank concerned and precipitate its failure.
- Regulator credibility at stake: The regulator would be under enormous pressure to compromise on regulation. Pitting the regulator against powerful corporate houses could end up damaging the regulator.
Why the Internal Working Group of the RBI has recommended so?
- Under the present policy, NBFCs with a successful track record of 10 years are allowed to convert themselves into banks.
- There are corporate houses that are already present in banking-related activities through ownership of Non-Banking Financial Companies (NBFCs).
- The Internal Working Group believes that NBFCs owned by corporate houses should be eligible for such conversion.
- The Internal Working Group argues that corporate-owned NBFCs have been regulated for a while. The RBI understands them well. Hence, some of the concerns regarding the entry of these corporates into banking may get mitigated.
India’s banking sector needs reform but corporate houses owning banks will not be the one that is required as of now.
Banking reforms
Context- RBI committee has recommended a series of changes that could transform the banking landscape by paving the way for large industrial conglomerates to set up banks.
What are Non-Banking Financial Companies NBFCs?
These are establishments that provide financial services and banking facilities without meeting the legal definition of a Bank. Hence they are frequently referred to as “shadow banks”.
Significance of NBFCs-
- These organizations play a crucial role in the economy, offering their services in urban as well as rural areas, mostly granting loans allowing for growth of new ventures.
- They alone count for 12.5% raise in Gross Domestic Product of our country.
- However, they are restricted from taking any form of deposits from the general public.
What are recommendations of RBI’s working group regarding NFBCs?
Proposal by RBI’s internal working group-
- The group also suggested giving banking licences to large corporate or industrial houses after necessary amendments to the Banking Regulation Act, 1949.
- It recommended increasing the size of the stake that promoters in private banks can hold to 26% from the current 15% over a 15-year time frame.
- NBFC or shadow bank with assets of Rs 500 billion and above, including those which are owned by a corporate house may be considered for conversion into a bank after 10 years of operations.
- Conversion to Small finance bank SFB-
- Payments banks with three years of experience can be eligible for conversion into a small finance bank.
- SFB and payments banks may be listed within 6 years from the date of reaching net worth equivalent to prevalent entry capital requirement prescribed for universal banks’ or ‘10 years from the date of commencement of operations, whichever is earlier.
- The minimum initial capital requirement for licensing new banks should be enhanced from ₹500 crore to ₹1000 crore for universal banks, and be raised to ₹300 crore from ₹200 crore for SFBs.
- For non-promoter shareholdings a uniform cap of 15% of the paid-up voting equity share capital of the bank instead of a current tiered structure.
- Non-operative Financial Holding Company (NOFHC) should continue to be the preferred structure for all new licenses to be issued for universal banks. However, it should be mandatory only in cases where the individual promoters/promoting entities/ converting entities have other group entities.
Way forward-
- It is a welcome idea to boost economic activity, job creation enhancing liquidity.
- Strict regulations on the use of funds held with the bank and monitoring of related party transactions will be essential, where corporate house is a promoter.
Lakshmi Vilas Bank (LVB) merger with DBS bank
Context: Lakshmi Vilas Bank (LVB) merger with DBS bank is justified
Why RBI decided for merger of Lakshmi Vilas Bank (LVB) amalgamation with DBS bank?
- Erosion of trust in financial institutions: India, over the past two years has seen the collapse of four financial firms: IL&FS, Dewan Housing Finance, Punjab and Maharashtra Cooperative Bank and Yes Bank.
- Rise in NPA’s: LVB’s bad loans have mounted to about a quarter of its gross advances, while deposits have shrunk by nearly Rs 6,900 crore in the last one year.
- Failure of bank’s management: They were unable to come up with a credible capital-raising and revival plan, forcing the RBI to seek its merger with another bank.
Why Investors in Lakshmi Vilas Bank (LVB) are unhappy over its amalgamation with Singapore’s DBS Bank?
- The Reserve Bank of India’s (RBI) proposed to write off LVB’s entire paid-up equity capital and reserves, resulting in a zero value of its shares.
- The situation is similar to that of Yes Bank’s AT-1 (additional tier-1) bond investors, who suffered a total write-down of their Rs 8,415 crore holdings as part of a rescue plan.
- The LVB’s shareholders, like Yes Bank’s AT-1 bondholders, are demanding compensation for the forced extinguishing of their investments.
The question of who is more important an Investor or a depositor?
- The RBI’s concern as a banking sector regulator is to first secure the interest of depositors because Banks, unlike regular companies, make money not from owning plants, machinery and property instead, it is derived from deploying other people’s money primarily deposits.
- No bank, however well-capitalised, can survive if depositors decide to pull out money.
Why the choice of amalgamating with DBS is right?
- Unlike public sector banks that are burdened with stressed loans and requirement of fund infusion, DBS has committed to bring in additional capital of Rs 2,500 crore upfront.
- Also, despite being a foreign bank, it has chosen to operate in India through a wholly-owned subsidiary, as opposed to just having branches.
- Has submitted itself to the RBI’s more stringent regulatory requirements, and DBS will be able to add 550-plus branches to its existing 33. This will send a strong signal to other foreign banks to pursue greater growth opportunities
- With Indian banks want for more capital, a foreign bank as desi is most welcome.
lakshmi vilas bank crisis
What are the reason of RBI to put LVB under moratorium and amalgamated with DBS Bank?
The RBI has now decided to impose a 30-day moratorium on Lakshmi Vilas Bank Ltd (LVB) due to the following reasons-
- Continuous Losses: The RBI said the financial position was declining steadily, with continuous losses over the last three years eroding the bank’s net-worth.
- Rising NPAs: Serious governance issues in recent years have led to deterioration in its performance. Almost one fourth of the bank’s advances have turned bad assets. Its gross non-performing assets (NPAs) stood 25.4% of its advances as of June 2020, as against 17.3% a year ago.
- The Tier 1 Capital ratio turned a negative 0.88% at the end of March 2020.
- Low Liquidity: It was also experiencing continuous withdrawal of deposits and low levels of liquidity.
- Unable to raise Capital: The bank has not been able to raise adequate capital to address these issues. The bank management had indicated to the RBI that it was in talks with certain investors, but failed to submit any concrete proposal.
- The capital ratio subsequently worsened to -4.85% by the end of September, tipping the central bank’s hand.
What happen to depositors and shareholders?
- Depositors- The RBI, which put a cap of Rs 25,000 on withdrawals, has assured depositors of the bank that their interest will be protected
- Deposit Insurance and Credit Guarantee Corporation (DICGC) gives insurance cover on up to Rs. 5 lakh deposits in banks.
- Shareholders of LVB– Equity capital is being fully written off. This means existing shareholders face a total loss on their investments unless there are buyers in the secondary market who may ascribe some value to these.
How has the pandemic affected the banking system?
- Worsen NPA -NPAs in the banking sector are expected to increase as the pandemic affects cash flows of people.
- RBI’s Financial Stability Report pointed out in its stress test indicated that the gross NPA ratio of commercial banks could worsen to as high as 14.7% by end of current financial year.
- The COVID-19 pandemic has stress on corporate balance sheets and governments burdened with large debt.
- Lurking around the corner is also the major risk– stress intensifying among households and corporations that has been delayed but not mitigated, and could spill over into the financial sector
Way forward-
Banks now need to adopt a ‘React, Adapt and Lead’ strategy to emerge stronger on the other side of the COVID-19 pandemic. After all, stronger banks and a sound financial services ecosystem will play a key role in the recovery of Indian economy.
Issue of Lakshmi Vilas Bank | 19th November
News: Reserve Bank of India imposed a 30-day moratorium on Chennai based Lakshmi Vilas Bank Ltd (LVB) and put in place a draft scheme for its amalgamation since its financial position underwent steady decline and posted loss for the last 3 consecutive years.
Under these developments, RBI has imposed the following conditions:
- RBI has put a cap of Rs 25,000 on withdrawals from the bank.
- Draft Scheme for amalgamation includes the amalgamation of LVB with DBS Bank India, a subsidiary of DBS of Singapore. Amalgamation will include all business, assets (including tangible and intangible), estates, rights, titles, etc. of LVB.
Background of the LVB issue:
- LVB shifted its focus from SMEs(Small and Medium Enterprises) to large businesses, in 2016-17 and loaned Rs 720 crore against fixed deposits of Rs 794 crore, which later turned into bad loans.
- In 2018, Religare Finvest sued the Delhi branch of LVB to recover fixed deposits worth about Rs 800 crore that the bank invoked to recover those loans.
- RBI put LVB under Prompt Corrective Action (PCA) framework in September 2019 due to which the bank was not able to issue fresh loans or open a new branch anywhere.
- Now RBI has formalised a scheme for its amalgamation as mentioned above.
What is Prompt Corrective Action (PCA)?
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Why this decision was taken?
- Erosion of the bank’s net-worth: Deposits has undergone a steady decline, with continuous losses over the last three years.
- Experiencing low levels of liquidity: Inability to raise adequate capital from market and due to continuous withdrawal of deposits.
- Increase in Non-performing assets: Almost one fourth of the bank’s advances have turned bad assets. Its gross non-performing assets (NPAs) stood 25.4% of its advances as of June 2020.
RBI’s power of amalgamation
- Under Section 45 of the Banking Regulation Act, a scheme of reconstruction or amalgamation can be prepared by RBI, during the period of amalgamation only.
- Once the moratorium comes into effect, the bank cannot lend, and existing depositors cannot withdraw beyond a specified amount.
- But the practice of imposing a moratorium was seen as disruptive as it carried the risk of undermining depositor confidence in the banks and financial stability.
- Thus, the government empowered RBI under Banking Regulation (Amendment) Ordinance 2020, to prepare a reconstruction scheme without having to first make an order of moratorium on barring deposit withdrawals.
Types of Private banks in India:
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Issues facing Private Banking Sector:
- Collapse of IL&FS(Infrastructure Leasing & Financial Services) in 2018 had set off a chain reaction in the financial sector, leading to liquidity issues and defaults.
- RBI had earlier this year bailed out Yes Bank through a scheme backed by State Bank of India and other banks
- Punjab & Maharashtra Co-op Bank was hit by a loan scam involving HDIL(Housing Development and Infrastructure Limited) promoters and the bank is yet to be bailed out.
- Most of the old generation Private banks do not have strong promoters, making them targets for mergers or forced amalgamation. For ex: In Karur Vysya Bank, the promoter stake is 2.11%, and in Karnataka Bank, there’s no promoter
- Asset Quality: biggest risk to India’s banks including Private banks is the rise in bad loans or Non Performing Assets(NPAs) along with the slowdown in the economy. This unforeseen COVID-19 Pandemic just increased that further. However, the impact will differ depending upon the sector.
Ex: banks lend to pharmaceuticals and IT seem to have benefited from reduced NPA and those who lend to hospitality, tourism, aviation expect to increase NPA’s further.
- Regulatory challenges : RBI’s CAR (Capital Adequacy Ratio) and other stringent regulations reduce Private sector banks Alternative investment opportunities
- HR challenges: Shortage of experienced and trained private bankers and high attrition levels means that talent is always in short supply
- Infrastructure challenges: Lack of appropriate and adequate physical and IT infrastructure is one of the major challenges facing the PB sector in India. Bank branches are not well equipped to cater to HNIs(High Net Worth Individuals) and UHNWIs(Ultra High Net Worth Individuals)
Solutions and way forward
- RBI constituted KV Kamath Committee tasked to recommend on the financial parameters required for a one-time loan restructuring window for corporate borrowers under stress due to the pandemic can reduce stressed assets and NPAs not only in private banks but in the entire banking system as a whole.
- Narashimham committee recommendation of Introduction of Narrow Banking Concept where weak banks will be allowed to place their funds only in the short term and risk-free assets can be followed in Private banks when they face loss for 4 consecutive quarters instead of RBI step into amalgamation or bailout
- Splitting the Chairman and Managing Director and allocating them fixed tenure of 3 to 5 years as advised by the PJ Nayak Committee can be followed for Private banks.
- Insolvency and Bankruptcy Code should be better utilized and have to complete within the provided timeline.
- Private banks have to improve their Promoters stake or look out for promoters.
Conclusion
With BASEL III norms on the cards Indian Banking sector has to be strengthened especially PSBs but that doesn’t mean the Private can be left out. A mutually strong, competitive private banking is the key to push the entire banking system.
Important Definitions:
HNIs: In India, those peoples who have more than 2 crores investible surplus are considered high net worth individual (HNI)
NPA’s: A loan whose interest and/or installment of principal have remained ‘overdue ‘ (not paid) for a period of 90 days is considered as NPA.
Stressed assets = NPAs + Restructured loans + Written off assets
Restructured asset or loan: assets which got an extended repayment period, reduced interest rate, converting a part of the loan into equity, providing additional financing, or some combination of these measures
Written off assets: assets which the bank or lender doesn’t count the money the borrower owes to it. The existing shareholders face a total loss on their investments unless there are buyers in the secondary market who may ascribe some value to these.
Moratorium on Lakshmi Vilas Bank
Context: RBI has imposed a moratorium on Lakshmi Vilas Bank and drafted a scheme for a merger.
Why it is a concern?
- Already, India’s banking system is distressed due to the failures of IL&FS, Punjab & Maharashtra Cooperative Bank and DHFL, followed by the bailout of Yes Bank.
- Now, the Reserve Bank of India decision to put in place a draft scheme for the amalgamation of Lakshmi Vilas Bank with DBS Bank India, a subsidiary of DBS of Singapore, has raised concerns about the safety of the financial system.
Why this decision was taken?
- Erosion of the bank’s net-worth: Deposits has undergone a steady decline, with continuous losses over the last three years.
- Experiencing low levels of liquidity: Inability to raise adequate capital from market and due to continuous withdrawal of deposits.
- Increase in Non-performing assets: Almost one fourth of the bank’s advances have turned bad assets. Its gross non-performing assets (NPAs) stood 25.4% of its advances as of June 2020
What has been the regulatory response to these failures?
- The announcement of moratorium by banking regulator.
- Followed by a reconstruction plan.
- Followed by the Capital infusion by banks and financial institutions by investing in the equity capital of the reconstructed entity
Issues faced by old-generation private banks?
- Lack of promoters: For example, the South Indian Bank and Federal Bank have been operating as board-driven banks without a promoter. In Karur Vysya Bank, the promoter stake is 2.11%, and in Karnataka Bank, there’s no promoter making them targets for mergers or forced amalgamation.
Are the depositors and the financial system safe?
- For small depositors, the Deposit Insurance and Credit Guarantee Corporation (DICGC), an RBI subsidiary gives insurance cover on up to Rs 5 lakh deposits in banks.
- Apart from this, additional infusion of capital and the proposed amalgamation will make the combined balance sheet of DBS India and LVB healthy.
What happens to the investors in these banks?
- Equity capital is being fully written off. This means that existing shareholders face a total loss on their investments unless there are buyers in the secondary market.
- The Equity Capital refers to that portion of the organization’s capital, which is raised in exchange for the share of ownership in the company.
- In the case of Yes Bank, too, some individual investors faced a total loss on their investments in AT-1 bonds.
- As per RBI rules based on the Basel-III framework, AT-1 bonds have principal loss absorption features, which can cause a full write-down or conversion to equity.
How far the loan stress caused by the pandemic impact the banking system?
- The impact will differ depending upon the sector, as segments like pharmaceuticals and IT seem to have benefited in terms of revenues whereas sectors like hospitality, tourism, aviation have been hit the most.
- However, due to the Pandemic, the Corporate sector debt that remains under stress has increased (worth Rs 37.72 lakh crore that is 72% of the banking sector debt to industry).
- An expert committee headed by K V Kamath recommended for a one-time loan restructuring window for corporate borrowers under stress due to the pandemic.
Priority Sector Lending (PSL) guidelines
Reserve Bank of India (RBI) released revised priority sector lending (PSL) guidelines to augment funding for COVID-19 impacted companies.
Facts:
- Aim: To align Priority Sector lending with emerging national priorities and bring sharper focus on inclusive development.
- Key Revised PSL Guidelines:
- Bank finance for start-ups (up to ₹50 crore), loans to farmers for installation of solar power plants for solarisation of grid connected agriculture pumps and loans for setting up Compressed BioGas (CBG) plants have been included as fresh categories eligible for finance under the priority sector.
- The targets prescribed for “small and marginal farmers” and “weaker sections” are being increased in a phased manner.
- The loan limits for renewable energy have been doubled and for improvement of health infrastructure, credit limit for health infrastructure (including those under ‘Ayushman Bharat’) has been doubled.
About Priority Sector lending (PSL)
- Priority Sector lending (PSL): It means those sectors which the Government and RBI consider as important for the development of the basic needs of the country and are to be given priority over other sectors. The banks are mandated to encourage the growth of such sectors with adequate and timely credit.
- Under this, Commercial banks including foreign banks are required to mandatorily earmark 40% of the adjusted net bank credit for priority sector lending.
- Regional rural banks and small finance banks will have to allocate 75% of adjusted net bank credit to PSL.
Categories: a) Agriculture b) Micro, Small and Medium Enterprises c) Export Credit d) Education e) Housing f) Social Infrastructure g) Renewable Energy and h) Others
National Payments Corporation of India (NPCI)
It is a “Not for Profit” umbrella organization for operating retail payments and settlement systems in India, is an initiative of RBI and Indian Banks’ Association (IBA) under the provisions of the Payment and Settlement Systems Act, 2007, for creating a robust Payment & Settlement Infrastructure in India.
It aims in bringing innovations in the retail payment systems through the use of technology for achieving greater efficiency in operations and widening the reach of payment systems.
The ten core promoter banks are State Bank of India, Punjab National Bank, Canara Bank, Bank of Baroda, Union Bank of India, Bank of India, ICICI Bank, HDFC Bank, Citibank N. A. and HSBC.
RuPay, an indigenous payment card of India launched by NPCI for all banks of India.
Developed by National Payments Corporation of India, Unified Payments Interface is an instant real-time payment system, facilitating inter-bank transactions.
Digital payment system in India
What is the role of RBI in the evolution of digital payment in India?
- RTGS- This system enables the transfer of money from one bank account to another on a “real-time” and on “gross” basis.
- Settlement happens in real-time.
- The large value payments on stock trading, government bond trading and other customer payments were covered under the RTGS, providing finality of settlement, thereby reducing huge risks.
- NEFT- NEFT facilitates funds transfer across all computerized branches of banks (member / sub-member of NEFT) across the country.
- Settlement happens in batches, and the system is available around the clock and RTGS will follow from December 2020.
- SEBI T+1 settlement– The market regulator SEBI is considering lowering the settlement cycle for completion of share transactions to T+1 (trade plus one day) to boost liquidity, improve efficiency and reduce payment-related risks to brokers and the system.
NPCI: National Payments Corporation of India (NPCI), an “Not for Profit” umbrella organization for operating retail payments and settlement systems in India, is an initiative of RBI and Indian Banks’ Association (IBA) under the provisions of the Payment and Settlement Systems Act, 2007, for creating a robust Payment & Settlement Infrastructure in India. It aims in bringing innovations in the retail payment systems through the use of technology for achieving greater efficiency in operations and widening the reach of payment systems.
What steps taken by government to promote digital payment?
- Zero merchant discount rate– In a bid to promote digital transactions, the government exempted merchants from paying merchant discount rate (MDR) cost for payments made through RuPay and UPI platforms.
Issues in Zero MDR –
- Discriminatory approach– For now, MasterCard and Visa cards are permitted to charge MDR. This has led the banks to switch to Visa and Master cards for monetary gains.
- The European Central Bank imposed a ceiling on MDR for all to protect consumer interest.
- NPCI must supply retail fee providers at a discounted value. This will result in a fee system community and infrastructure in rural and semi-urban areas in partnership with Fin-Tech firms and banks.
Way forward: Government needs to take corrective action in the next Budget to ensure a level playing field and to relieve the NPCI from such policy-induced market imperfection.
Land Reforms
Conclusive land titling system in India and its challenges – Explained pointwise
Table of contents:
At present in India, ownership of land is determined by registered sale deeds, property tax receipts, and survey documents. In this system, the buyer is responsible for proving ownership of the land.
Recently the NITI Aayog proposed to change this system by implementation of Conclusive Land Titling system. NITI Aayog also framed a Model Bill on Conclusive Land Titling for this purpose. But the states are reluctant to implement it. Thus, in this article, we will analyse this new proposed model and the issues associated with it.
What is a Conclusive Land Titling system?
It is a type of land titling method followed in countries such as Australia, England, Canada, etc.
In this land titling method, the State (the government) will provide a guarantee on land titles. The government will also include provisions for compensation in case of any dispute of land title between two parties.
How it is different from the present one?
India at present follows the Presumptive land titling method. The difference between the two is mentioned in the following table:
Development towards Conclusive Land Titling in India:
- Currently, land records systems in the country represent the Zamindari and Ryotwari models.
- The importance of updating land records was emphasized long back in the First Five-year Plan (1951). But the land records saw little improvement.
- In 1989, the D.C Wadhwa committee (single-member committee) studied the land records and released a report titled “Guaranteeing Title to Land”. In that, it mentioned the importance of conclusive titles to the people.
- Digital India Land Record Modernization Programme was launched in India, in 2008 with the objective of digitization of land records. This also highlighted the importance of moving away from the current Presumptive land titling to Conclusive land titling.
- In 2011, the government drafted a Model Land Titling Bill 2011. The bill asked the state government to move towards Conclusive titling. But only Rajasthan and Maharashtra enacted the law and took a few steps.
- In 2020, the NITI Aayog released the model Bill on Conclusive Land Titling. This was sent to the States and Union Territories for getting their feedback. However, many States failed to send their feedback. Following which the Centre recently warned that the model bill would be concluded.
How the Model Bill aims to implement Conclusive Land Titling in India?
The draft model bill aims to achieve Conclusive land titling in the following ways:
- The Model Bill provides for setting up of Land Authorities in each State. These authorities will be responsible to appoint a Title Registration Officer (TRO).
- TRO’s will prepare and publish a draft list of land titles based on existing records and documents.
- Based on the draft list, potential claimants interested in the property will have to file their claims or objections within a fixed time period.
- Once disputes are received, the TRO will verify all the relevant documents and refer the case to a Land Dispute Resolution Officer (LDRO) for resolution.
Note: The disputes currently pending in courts cannot be resolved in this way. - Once, the disputes are resolved, the Land Authority will publish a Record of Titles.
- If there are any ambiguities in Record of Titles or regarding the decisions of the TRO and the LDRO, it can be challenged before Land Titling Appellate Tribunals within 3 years.
- After, three-years, entries in the Record of Titles will be considered conclusive proof of ownership. Further, appeals can only be taken up in High Courts.
What is the need to shift towards Conclusive Land Titling?
Shifting from Presumptive land titling to Conclusive Land Titling has the following advantages.
- A Conclusive land titling system will significantly reduce land-related litigation. A World Bank study from 2007 states that land-related disputes account for two-thirds of all pending court cases in the country.
This is because, in the current system, people have to maintain the entire chain of transaction records (sale deeds, records of inheritance, mortgage, and lease). - To increase the investment in many sectors: Currently, long pending court cases diminish the prospects for investment in many sectors of the economy. In Conclusive titling, the businesses will be guaranteed and investments will be secured. This can avoid large delays and inefficiency in infrastructure projects.
- To improve the revenue of the local body and the government. Urban local bodies depend heavily on property taxes. Property tax can be levied properly only if there is clear ownership data available.
- Conclusive Land Titling provides better security to farmers. Unclear titles make it difficult to prove land ownership. The land is used as collateral by farmers for accessing formal credit.
- Improper records result in Benami transactions. These transactions are used for the investment of black money in the country.
What are the difficulties?
The introduction of a Conclusive Land Titling system can be feasible with proper land records. But, there are many challenges associated with the land records in India. They are,
- Land is a State subject in India. The individual States are responsible for the proper implementation of land records. In the absence of a uniform system, existing land records are maintained in different scripts and languages in different States.
- Land records are not updated for decades, especially in rural and semi-urban areas. Conclusive land titles can create more problems if the land records are not updated.
- In India, the majority of the land records are in the name of the grandparents of the current owner, with no proof of inheritance.
- Apart from that, forgery, cases of fraud, and misconduct surrounding land ownership are also there in India. This increases the ownership disputes reaching courts and overburden the judicial mechanism.
If the government wants to introduce the conclusive land titling, then it not only needs to solve all the pending cases but also needs to solve the cases currently unreported and unidentified .
Suggestions:
India needs to move towards proper land records, then only we can shift towards a Conclusive Land Titling system. The government can follow suggestions like,
- Implementing the recommendation of the Committee on State Agrarian Relation in 2007. The committee recommended,
- A comprehensive village-level survey with community involvement is required to solve the land-related problems.
- Providing adequate skill training to the local government employees.
- Further, it suggested that the government should use technologies such as GIS, GPS, and satellite imagery to update land records.
- Further, the government needs to integrate the cadastral maps (Comprehensive land maps) with textual data of land. This can be performed during the sale, inheritance, purchase, gift, mortgage, and tenancy of a property. This will ensure complete information with relation to land is available and updated.
- Apart from that, the government also needs to amend laws across the Centre and States to ensure uniformity in land records.
In conclusion, the introduction of a Conclusive Land Titling system is an ambitious step. However, to avoid further complexities the practical difficulties involved in its implementation has to be taken care of.
New land allotment policy of Jammu and Kashmir (J&K)
Why in News?
A new policy has been approved for Jammu and Kashmir. The policy focus on the allotment of land to industrial entrepreneurs.
What are the objectives of the policy?
- To address various land-related issues that are creating hurdles in the industrial development of Jammu and Kashmir. It will be done by a framework to regulate zoning of industrial areas, project appraisal, and evaluation.
- To promote inclusive growth through sustainable industrialization and employment generation. It also includes provisions of a fair and transparent mechanism for land allotment for industrial use.
Key Features of the Policy:
- Land Allotment: The policy covers allotment of land to industrial entrepreneurs, health institutions/ medi-cities, and educational institutions/Edu-cities.
- Zoning of Areas: It proposes zoning (divides land into areas called zones) of industrial areas at block and municipality levels. Zoning will be done after taking into account existing levels of industrial development in the area, its location, and level of urbanization.
- Committees: The policy provides for the constitution of;
- Divisional Level Project Appraisal and Evaluation Committees to scrutinize applications received for allotment of industrial land within 30 days
- Apex Level Land Allotment Committee, High-Level Land Allotment Committee, and Divisional Level Land Allotment Committee to decide and allot industrial land worth Rs 200 crore, Rs 50-200 crore, and up to Rs 50 crore respectively. The time limit for allotment is within 45 days.
- Duration of Allotment: The land will be allotted to the investors on lease for a period of 40 years initially, which could be extended to 99 years.
- Cancellation: The allotted land will be cancelled in the following cases.
- Failure of the investor to take effective steps within the stipulated time of two years
- Failure of the industrial unit to come into production within three years
- Violation of provisions under the lease deed and
- Non-cooperation of an enterprise for a period of five years.
- Renting out Allotted Land: The policy allows renting out of 60% of the built-up area of a business enterprise for setting up an ancillary industrial enterprise through a tripartite agreement.
Source: Indian Express
The state of farmers
Context: While the farmers demand a repeal of the three new farm laws, the government insists the reforms are “farmer-friendly”.
What is the aim and impact of the new farm laws?
- Aim of farm laws: The farm laws seek to introduce the neoliberal notion of “choice” into the production and sale of agricultural produce through deregulation. It tries to give a push to private traders and agricultural corporations.
- Impact on small farmers: Small and marginal farmers, a section that constitutes 85 per cent of farm landholdings are likely to be worst hit, with the lowest bargaining power and highest level of precarity.
What are the problems faced by farmers?
- The scale of land acquisition: It has increased exponentially since the nineties, with the estimate for all displaced people up from approximately 25-30 million by 1990 to 60 million by 2004.
- Policy framework: A policy framework shaped by the needs of capital which needs land but not the people, creates a system that renders survival cultivators unnecessary or surplus to development initiatives of the state.
- Survival cultivation: Where many small and marginal farmers engage in survival cultivation, sale of agricultural produce is limited to the need for cash or an assured surplus.
- In 2018-19, the consumption of nitrogen, phosphorus and potassium fertiliser in Maharashtra, UP, Assam and Jharkhand was 125.95 kg/hectare (ha), 170.09 kg/ha, 73.69 kg/ha and 59.79 kg/ha respectively (Agricultural Statistics at a Glance, 2019).
- The state-wise scale of indebtedness of agricultural households: The All-India Report on Agriculture Census 2010-11 shows the level of indebtedness toebtedness to be 57.3 per cent in Maharashtra , 43.8 per cent in UP , 17.5 per cent in Assam and 28.9 per cent in Jharkhand.
- These figures are representative of the increased cash dependence of agriculture in commercially significant states as Maharashtra and UP, and a significantly lower level of debt in states like Jharkhand and Assam.
- Land arrangements: Several informal land arrangements are being stripped away constantly, leaving subsistence peasants more dependent on cash for meeting everyday requirements of life and propelling them deeper into an unequal market that constantly reproduces their position at the margins.
Mention a few state policies that seeks to establish powers of state over land?
- The new Land Acquisition Law 2013: It has introduced significant changes from the colonial 1894 Law, it serves to firmly keep in place the principle of eminent domain by which the state retains excessive powers over land and, thereby, facilitates the process of land acquisition in the long run.
- New strategy: The constant expansion of forest lands is itself the latest strategy to bypass mandated procedures for land acquisition under the new Right to Fair Compensation and Transparency in Land Acquisition and Rehabilitation and Resettlement Act 2013.
- The latest Environmental Impact Assessment Draft Notification 2020: It seeks to facilitate ease of doing business by clearing “obstacles” for businesses such that permissions are simpler to get and grievances harder to file.
Way forward
For a healthy farm sector, the state must strengthen and protect the position of the cultivator.
Consolidation of land holdings
Source: Indian Express
Syllabus: Gs3: Land Reforms in India
Context: In the last three decades, the issue of land and consequently land reforms was an important topic.
The elements of land reforms:
- The abolition of intermediaries.
- Regulation and stability of the tenurial system
- Ceiling on land holding.
- Consolidation of land holdings.
Background of land reforms:
- After Independence, compulsory consolidationwas replaced by voluntary consolidation in almost all states. However, considering its utility, the National Commission of Agriculture recommended that consolidation schemes should be made compulsory across the country.
- Land consolidation:
- As much as 120 lakh Ha had been consolidated by the end of the Fourth Plan, while 440 lakh Ha of land was consolidated by the end of the Fifth Plan.
- Punjab and Haryana have almost completed the work of consolidation of landholdings.
- The Sixth Five Year Plan had targeted the completion of consolidation in 10 years. During its period, only 64.75 lakh hectare of land was consolidated. Progress was not uniform across the states.
- Rajasthan, Andhra Pradesh, Kerala and Tamil Nadu and other southern states have not even begun the task.
- Now, structure and composition of the economy changed, the importance of agriculture and consequently of land-related matters went down.
- In the last 15 years, land acquisition and computerisation of land records have become more important issue than land reforms.
Current scenario:
- Farmer crisis: for instance, Rural debt waivers, farmers’ agitations, farmers’ suicides, migration and reverse migration in the wake of COVID-19.
- Fragmentation of land: The average holding size in 1970-71 was 2.28 hectares (Ha), which has come down to 1.08 Ha in 2015-16. The holdings are much smaller in densely populated states like Bihar, West Bengal and Kerala.
- Uneven and skewed distribution:Nagaland has the largest average farm size, Punjab and Haryana rank second and third respectively.
- Rise in number of holdings:the number of holdings is rising at almost the same pace as the population. These holdings are not in one chunk but in multiple sub-parcels located at different places in a village.
Implications:
- Poor investment: fragmentation of land leaves no incentive for the farmer to invest in the farm land due to lack of productivity.
- Subsistence farming:Farmers are unable to raise plantations because the size is not substantial for them to invest in ancillary works like drip or appoint a caretaker.
- Difficult to dispose of such fragmented land:As there are number of landholders, that’s why buyers do find it attractive to buy. It is difficult to deal with so many landholders and to arrange necessary infrastructure like road, water supply and electricity.
- Fragmentation of land and difficulty in disposing of such land leads to poor investment in rural areas.
Significance of land consolidation:
- It helps farmers to make investments, enabled roads and irrigation channels to be laid.
- Reduced litigation.
- Allows farmers to formalise informal partitions
- Reduced inequity in landholdings to some extent.
- Enhance farmer’s autonomy.
- Increased production and productivity.
- Promote rural investment.
Way forward:
- Non-farm sector employment contributes about 60 per cent to the household income in rural areas. Therefore, policies conducive for the promotion of sectors such as small industries, education, health and other service enterprises need to be made.
- Encourage land consolidation:consolidated holdings would make it easy for the government or private enterprises to acquire land, and for public agencies to lay the road, pipeline or electric supply.
- Land leasing: It is also proposed by NITI ayog. It should be adopted on a large scale to enable landholders with unviable holdings to lease out land for investment, thereby enabling greater income and employment generation in rural areas.
- Promote use of technology: information technology, drone technology, and land record digitisation can be used to consolidate land.
Indian Agriculture Reforms
Source- The Indian Express
Syllabus- GS 3 – Land reforms in India.
Context- Farmers and state governments across India don’t want APMCs.
How many farmers are there in India?
- Based on the self- declaration- Almost 111 million farmers are registered for the Pradhan Mantri Kisan Samman Nidhi(PM-Kisan). The eligibility criteria for this scheme are-
- Registration requires the family to hold cultivable land, duly registered.
- If a family member is relatively privileged (MP/MLA, pension exceeding Rs 10,000, an income-tax payer, or a professional), one can’t opt for the PM-Kisan benefits.
- For any false declaration there are penalties also.
Therefore, 111 million is a lower bound figure. Other than some categories being barred from PM-Kisan benefits, not every eligible farmer has necessarily registered for PM-Kisan.
- Based on Agriculture Census- In India, in every five years people have an agriculture census.
- 2010-11 – There was 138 million holdings.
- 2015-16 – It gave 146 million holdings which is a result of further fragmentation.
If the agricultural landholding is conditional on being a farmer, apart from a possible further increase since 2015-16, 146 million is possibly the upper bound.
- Based on various acts-
Every definition of “farmer” is not contingent on the ownership of land.
For Example-
- The Protection of Plant Varieties and Farmers’ Rights Act, 2001– Where status as a farmer depends on cultivating land (or supervising cultivation), not owning it.
- Draft National Policy for Farmers, 2006–That issue was also flagged by the National Commission on Farmers, such as in the Draft National Policy for Farmers (2006), where “farmers” included agricultural labourers, sharecroppers and tenants and so on. When talking and generalising about farmers, it is necessary to specify which set one has in mind.
What is the quality of land records in various states when land is a prerequisite for defining someone as a farmer?
- The Committee on State Agrarian Relations and the Unfinished Task in Land Reforms, 2009-
- Absence of land holding data – The last extensive survey and settlement in India was conducted two to three decades prior to Independence which means in the 1920s.
- Department of Land Resources has a Digital India Land Records Modernisation Programme (DILRMP) –
- DILRMP is often about digitising/modernising existing land records.
- The DILRMP dashboard tells that digitisation of land records have been completed in only 11.5 per cent of villages.
For Example- Gujarat, West Bengal and Tripura score high on this (over 90 per cent). Punjab’s track record is 0 per cent.
What is 2015-16 Agricultural Census report?
According to the Agricultural Census report 2015-16 –
- Highest operated areas-The highest operated areas are in Rajasthan, Maharashtra, UP and MP, in that order. 86.1 per cent of holdings are small and marginal (less than 2 hectares) and only 0.6 per cent is large (more than 10 hectares).
- FCI procurement-There is increasing FCI procurement of rice from Telangana, Andhra Pradesh, Chhattisgarh and Odisha and of wheat from MP, UP and Rajasthan.
- E-NAM(National Agricultural Market) has more coverage from MP, UP, Rajasthan, Maharashtra and Gujarat than from Punjab or Haryana.
Way Forward
The face of Indian agriculture has changed and is no longer what it was in the Green Revolution days, centred on Punjab, Haryana and western UP. With realistic input costs, that form of agriculture is no longer viable in those Green Revolution tracts.
Financial Market
Government announced “Single Security Market Code”
What is the news?
Government has announced the setting up of a Single Security Market Code.
- Coverage: It will consolidate the provisions of SEBI Act,1992, Depositories Act, 1996, Securities Contracts (Regulation) Act,1956, and Government Securities Act,2007.
- Impact: This move will improve the ease of doing business in the country’s financial markets. Moreover, it will cut down compliances cost and do away with friction between various stakeholders.
Institutional body for bond market:
- News: Government has proposed the establishment of a permanent institutional body. It will purchase investment-grade debt securities both in stressed and normal times. Thus, It will help in the development of the bond market.
- Impact: This would bring confidence among participants in the corporate bond market during times of stress and will improve the secondary market liquidity.
Source: The Hindu
India’s Sovereign Ratings don’t reflect its fundamentals
Source: Indian Express, The Hindu
Gs3: Indian Economy and issues relating to Planning, Mobilization of Resources, Growth, Development and Employment.
Synopsis: The Economic Survey 2020-21 concludes that sovereign credit ratings are biased, and they do not reflect the Indian economy’s fundamentals.
Background:
- Currently, India’s sovereign rating is rated under a very low investment grade.
- Though it will not impact market performance, rupee value against the dollar, or on G-Sec yield. But it can impact the FPI inflow into equity and debt instruments.
On what basis the economic survey has made this remark?
- As per the survey, it is for the first time in history, India, which is the fifth-largest economy in the world, has been rated as low in the investment-grade (BBB-/Baa3).
- Historically, the fifth-largest economies have been mostly rated AAA. It reflects the economic size and its ability to repay debt. China and India are the only exceptions to this rule.
What is the solution to address this issue?
- The economic survey suggested reworking the sovereign credit rating methodology to make it more transparent and less subjective.
- It also called for co-operation among developing economies to address this bias and subjectivity, inherent in sovereign credit rating methodology.
What are the other factors affecting investment according to the Economic survey?
- The Economic survey pointed out the issue of over-regulation in the Indian economy. The survey suggested simplification of regulatory processes along with transparent decision-making processes.
- The survey also highlighted the problem of asymmetric information between the regulator and the banks which was noticed during the forbearance regime. (short-term relief for borrowers to postpone loan payments-Witnessed during the Pandemic)
- The survey suggested conducting an Asset Quality Review exercise immediately after the forbearance is withdrawn.
India’s willingness to pay debts is demonstrated often through its zero sovereign default history. So, the current sovereign ratings are not a representation of India’s growth and commitments.
Decriminalisation of offences under LLP Act
Why in News?
The Company Law Committee has recommended decriminalizing 12 offences under the Limited Liability Partnership(LLP) Act. It has also said that LLPs should be allowed to issue non-convertible debentures(NCDs) to raise funds. It will help them in improving the ease of doing business for LLP firms.
Facts:
- Limited Liability Partnership(LLP): It is an alternative corporate business form in which some or all partners (depending on the jurisdiction) have limited liabilities.
- Under this, partners are not responsible or liable for another partner’s misconduct or negligence. This is an important difference from the traditional unlimited partnership in which each partner has joint liability.
- Act: All limited liability partnership in India is governed under the limited liability partnership act of 2008. The Ministry of Corporate Affairs implements the Act.
Recommendations of the committee:
- Decriminalising offences: The committee has recommended decriminalizing several offences related to timely filings, including annual reports and filings on changes in partnership status of the LLP, not related to fraud.
- It is to be noted that none of these offences attracts imprisonment. Instead, these offences attract fines.
- Penalties instead of Fines: Committee recommended the companies should be made to pay penalties instead of fines.
- This is because fines are counted in the criminal charges. It results in a convicted person being disqualified or becoming ineligible for various posts.
- Authority to impose Penalty: The Registrar of Companies should have the authority to levy penalties for any contravention of provisions of the LLP Act.
- LLPs to issue NCDs: LLPs which are currently not allowed to issue debt securities should be allowed to issue non-convertible debentures (NCDs) to facilitate the raising of capital and financing operations. The move is likely to benefit startups and small firms in sectors which require heavy capital investment.
Additional Facts:
What are Non-convertible debentures(NCDs)?
- Debentures are long-term financial instruments which acknowledge a debt obligation towards the issuer. Some debentures have a feature of convertibility into shares after a certain point of time at the discretion of the owner. The debentures which can’t be converted into shares or equities are called non-convertible debentures (or NCDs).
- NCDs are used as tools to raise long-term funds by companies through a public issue.To compensate for this drawback of non-convertibility, lenders are usually given a higher rate of return compared to convertible debentures.
- Besides, NCDs offer various other benefits to the owner such as high liquidity through stock market listing, tax exemptions at source and safety since they can be issued by companies which have a good credit rating.
Source: Indian Express
Green bonds
Why in News?
According to the Reserve Bank of India(RBI), the cost of issuing green bonds in India has generally remained higher compared to other bonds. It is largely due to asymmetric information.
About Green Bonds:
- It is a debt instrument just like any other normal bond, issued by an issuer for raising funds.
- The only difference is that these instruments are designed specifically for funds to support specific projects benefitting the environment.
- Green bonds typically come with tax incentives to enhance their attractiveness to investors.
- The World Bank issued the first official green bond in 2009.
Green Bonds in India:
- Yes Bank was the first Indian Bank to issue Green Infrastructure Bonds (GIBs) in India in 2015.
- SEBI has allocated the following eight categories with the tag of green projects:
- a) renewable energy b) clean transportation c) sustainable water management d) climate change e) energy efficiency f) sustainable waste management and g) land use and h) biodiversity conservation.
Issues with Green Bond in India:
- Green bonds constituted only 0.7% of all the bonds issued in India since 2018.
- As of March 2020, Bank lending to renewable energy constituted 7.9% of outstanding bank credit to the power sector.
- The average coupon rate for green bonds in India with maturities between 5 to 10 years has generally remained higher than the corporate and government bonds with similar tenure.
Suggestions:
- Better information management system in India may help in reducing maturity mismatches, borrowing costs and lead to efficient resource allocation in Green Bonds.
SEBI moots entry norms to set up stock exchanges
News: Securities and Exchange Board of India (SEBI) has proposed a new framework for ownership of Market Infrastructure Institutions(MII) to facilitate new entrants to set up stock exchanges and depositories.
Facts:
- What is Market Infrastructure? It is a system administered by a public organisation or other public instrumentality, or a private and regulated association or entity, that provides services to the financial industry for trading, clearing and settlement, matching of financial transactions and depository functions.
- Examples: Examples of MIIs include stock exchanges, depositories and clearing corporations. These are systemically important institutions whose failure could lead to bigger cataclysmic collapses bringing down the economy.
Key Proposals:
- A resident promoter setting up an MII may hold up to 100% shareholding, which will be brought down to not more than (either 51% or 26%) in 10 years.
- A foreign promoter from Financial Action Task Force FATF member jurisdictions setting up an MII may hold up to 49% shareholding, which shall be brought down to not more than (either 26% or 15%) in 10 years.
- Foreign individuals or entities from other than FATF member jurisdictions may acquire or hold up to 10% in an MII.
- Any person other than the promoter may acquire or hold less than 25% shareholding.
- At least 50% of ownership of the MII may be represented by individuals or entities with experience of five years or more in the areas of capital markets or technology related to financial services.
What are Municipal Bonds?
Source: The Indian Express
News: Vadodara Municipal Corporation(VMC) is expected to launch municipal bonds and will become the third Urban Local Body(ULB) in Gujarat to use municipal bonds to raise money.
Facts:
- Ahmedabad was the first city in South Asia to launch a municipal bond in 1998 which was completely subscribed.
- The Surat Municipal Corporation was the second city in Gujarat to announce bonds in 2018.
What are Municipal Bonds?
- Municipal Bonds is a kind of debt instrument where investors offer loans to local governments.
- Purpose: They are issued by civic bodies for specific projects and usually have a 10-year tenure. The ULB pays the annual interest on the bonds to the investor at the decided rate.
- Difference: The difference between a bank loan and a municipal bond is that any institution can secure a bond only if it has favourable credit ratings.
- Benefits: The bond helps raise funds from the stock market. The bond also increases the number of investors available to the civic body, as compared to a loan from a single bank.
How is the Central Government promoting Municipal Bonds?
- Under the Atal Mission for Rejuvenation and Urban Transformation (AMRUT) scheme, urban local bodies (ULBs) are encouraged to tap the bond market.
- AMRUT Scheme: It was launched in 2015 by the Ministry of Housing and Urban Affairs.It aims to ensure universal coverage of drinking water supply and substantial improvement in coverage and treatment capacities of sewerage and septage along with storm water drainage, non-motorized urban transport and green spaces & parks.
- The government also pays ULBs Rs 13 crore for every Rs 100 crore raised via bonds subject to a ceiling of Rs 26 crore for each.This incentive takes care of the repayment that the ULB must make to the lender including the interest component.
Zero-coupon bonds: Innovative govt tool to fund PSBs, keep the deficit in check
Zero-coupon bonds:
Source: The Indian Express
News: The government has used Zero-Coupon Bonds to recapitalize Punjab & Sind Bank by issuing the lender Rs 5,500-crore worth of non-interest bearing bonds valued at par.
Facts:
- What are Traditional Zero-Coupon Bonds? These are debt security that does not pay interest but instead trades at a deep discount, rendering a profit at maturity, when the bond is redeemed for its full face value. The difference between the purchase price of a zero-coupon bond and the par value indicates the investor’s return.
- What kind of Bonds are issued to Punjab & Sind Bank? These are non-interest bearing, non-transferable special Government of India(GOI) securities having a maturity of 10-15 years and issued specifically to Punjab & Sind Bank.
- How are they different from traditional Zero-Coupon Bonds? Though zero-coupon, these bonds are different from traditional zero-coupon bonds on one account — as they are being issued at par, there is no interest; in previous cases, since they were issued at discount, they technically were interest bearing.
India and UN-Based Better Than Cash Alliance organizes learning on fintech solutions
Source: Click here
News: India and UN-Based Better Than Cash Alliance organized a joint Peer learning exchange on fintech solutions for responsible digital payments at the last mile.
Facts:
- Better Than Cash Alliance: It was created in 2012 as a partnership of governments, companies and international organizations that accelerates the transition from cash to responsible digital payments.
- Launched by: It was launched by the United Nations Capital Development Fund, the United States Agency for International Development, the Bill & Melinda Gates Foundation, Citigroup, the Ford Foundation, the Omidyar Network and Visa Inc..
- Members: The Alliance has 75 members which are committed to digitizing payments.
- Objectives: The Alliance Secretariat works with members on their journey to digitize payments by:
- Providing advisory services based on their priorities.
- Sharing action-oriented research and fostering peer learning on responsible practices.
- Conducting advocacy at national, regional and global level.
Exclusive arbitration body for financial disputes
Context: India needs a special arbitration body for financial disputes.
Why financial institutions resort to litigation instead of arbitration for settling disputes?
- Courts are more powerful: Litigation, offers a more potent forum for recovery of money and resolving financial disputes as the judges are vested with stronger powers than an arbitrator. such as interim measures, summary judgments, warrants for non-appearance, etc., which are not available in arbitration.
- Creates more pressure on defaulter: In addition, the public nature of disputes in courts allows the banks to create pressure on the defaulters to discharge their debts as public disclosure hinders their future investment prospects.
Why settling financial disputes through courts is disadvantageous?
- Judges lack technical knowledge: The judges in these jurisdictions are not competent enough to understand complex transactions and financial instruments. After 2009-09 financial crisis, the financial institutes felt a need for adjudicators who possess a deep knowledge of finance and an understanding of complex transactions.
- Litigation negatively impacts economy as a whole: Moreover, financial disputes of large size often lead to public distress, resulting in negative impacting listed stocks which could consequently lead to collapse of economies, if big financial institutions are involved.
What is the advantage of resorting to arbitration over litigation?
- Confidentiality: Arbitration maintains privacy of proceedings and ensures that the adjudicator is a person with expertise in finance
- Relatively Easy enforcement: It is easier to enforce an arbitral award as opposed to a court judgment which can be appealed multiple times.
Why India needs a special arbitration body?
- No special body for financial arbitration exists in India and such arbitrations continue to be adjudicated by retired judges, who are generalists and do not possess a specialized knowledge of finance and financial markets.
- Considering the rise of financial disputes in India, including defaults by some of the biggest Indian corporations such as Anil Ambani’s Reliance Group, Vijay Mallya’s Kingfisher and Nirav Modi’s Firestar Diamonds, there is a need for providing a specialised institution to deal with financial arbitrations.
What we can Learn from the International experience?
- In America, the Financial Industry Regulatory Authority (FINRA) provides assistance and advice for dispute resolution involving securities.
- Similarly, The Panel of Recognised Market Experts in Finance (P.R.I.M.E. Finance) was set up in The Hague, Netherlands, in 2012 for providing a panel of arbitrators specialising in banking and finance, offering arbitration rules tailor-made for financial arbitrations and providing financial experts for assistance during such arbitrations.
- The Institute of Chartered Accountants of India (ICAI) is one such institution which possesses a body of some of the most prominent financial experts in India. Perhaps, the government should create a panel in consultation with the ICAI for facilitation of financial arbitrations.
Explained: What are Negative Bond Yields?
News: The demand for negative yield bonds is on rise in the global market.
Source: Click Here
Facts:
- Negative-yield bonds: These are debt instruments that offer to pay the investor a maturity amount lower than the purchase price of the bond. These are generally issued by central banks or governments and investors pay interest to the borrower to keep their money with them.
- Why do investors buy Negative Yield Bonds?
- Pledge asset: Bonds are often used to pledge as collateral for financing and as a result need to be held regardless of their price or yield.
- Currency Gain: Some investors believe they can still make money even with negative yields. For example, foreign investors might believe the currency’s exchange rate will rise, which would offset the negative bond yield.
- Deflation Risk: Domestically, investors might expect a period of deflation, or lower prices in the economy, which would allow them to make money by using their savings to buy more goods and services.
- Safe Haven Assets: Investors might also be interested in negative bond yields if the loss is less than it would be with another investment.
RBI sets up Reserve Bank Innovation Hub(RBIH)
Source: Click here
News: Reserve Bank of India(RBI) has announced the setting up of an Innovation Hub under the chairmanship of Kris Gopalakrishnan.It has also selected two entities for testing products under regulatory sandbox structure.
Facts:
- Aim: To create an ecosystem that would focus on promoting access to financial services and products and will also promote financial inclusion.
- Features:
- The Hub will collaborate with financial sector institutions, technology industry and academic institutions and coordinate efforts for exchange of ideas and development of prototypes related to financial innovations.
- It would also develop internal infrastructure to promote fintech research and facilitate engagement with innovators and start-ups.
Additional Facts:
- Regulatory Sandbox: It is an infrastructure that helps financial technology (FinTech) players live test their products or solutions before getting the necessary regulatory approvals for a mass launch.
Divestment in fossil fuels
What do you mean by Divestment movement in Fossil fuels?
- Divestment is the process by which money put into stocks and bonds of certain companies is withdrawn. A divestment is the opposite of an investment.
- For example, recently Goldman Sachs announced that it would no longer finance new oil drilling in the Arctic National Wildlife Refuge and coal mines such as mountain-top mining
- In this case, divestment has been directed against companies that extract, refine, sell and make profits from fossil fuels.
- The purpose is to restrict fossil fuel companies’ ability to function to limit their impact on climate change.
- As of 2019, it is estimated that more than $11 trillion in assets has been committed to divestment from fossil fuels.
What is the role of Climate activist in divestment process?
- Systematic organised drives for divestment from fossil fuel companies have been undertaken by a large network of activists including Rainforest Action Network, 350.org, Go Fossil Free, university students and faculty etc.
- They systematically attacked equity, investments, loans, or credit, available to the fossil fuel industry.
What are the challenges?
- After the Paris Agreement of 2015, where countries agreed to try to limit average global warming to well below 2oC, global banks continue to finance the fossil fuel industry.
- Finances has been increasing to fossil fuel sub-sectors such as oil from tar sands, Arctic oil ang gas etc. For example, coal power financing led by Chinese banks.
- Companies might be divesting not for ethical reasons but because it considers fossil companies to be risky.
What is the way forward?
- India’s contribution to the stock of greenhouse gases is less than two tonnes of CO2/capita.
- Yet, with the costs of production and storage of renewables are falling policymakers should utilise this oppurtunity and foresee to make a just transition away from coal in the near future.
- This process will be complex and necessarily involve many sectors and activities including land restoration, local jobs, and timely transfer of storage technologies for renewable energy, apart from dealing with entrenched vested and political interests
Industries and Industrial Policies
PM Modi’s Acknowledgement of role of private sector
Synopsis: Future growth in India should be led by the private sector. The government should encourage the private sector as a central part of its strategy.
Introduction
Recently the prime minister acknowledged the role of the private sector. Now it is up to the private sector to grow their business, pursue excellence, follow the law of the land and pay taxes.
Why the role of the private sector is critical in India?
- India has limited capital and the private sector is the best provider of capital in the economy. The private sector will deliver the most benefit in terms of growth or return on capital employed.
- Private sector focus on wealth creation. The PM also praised the wealth creators with a logic that if you can’t create wealth, you won’t be able to distribute it. The creation of wealth is essential for growth, employment and the reduction of poverty.
- India’s successes in many fields linked to the private sectors. Sectors such as banks, airlines, insurance, telecom, IT services, IT-enabled services etc were created a huge growth after they have been open up to private players.
What can be expected from PM speech?
The Prime Minister’s speech has raised the expectations that more positive reform for the private sector is around the corner.
- First, the government can now bring in policy and future economic reforms in India as it has recognised the private sector’s role in parliament.
- Second, India has been making worthy steps in the Ease of Doing Business. It is easier to start a business in India than it was a decade ago. The government is willing to listen and gives a good head start to solving those problems.
- Third, the success of the Mudra Yojana and Start-up India has proven the new wave of innovation and enterprise in young India. India is now willing to look at other sectors such as space, defence, aeronautics.
- Fourth, Private involvement in the India stack (Stack is a combination of technological projects that comprises all the technologies required to operate for any particular sector) has revolutionised the fintech sector. Now the digital health stack will likely to do the same for the health tech sector.
Suggestions:
- The private sector should now follow the law of the land and pay taxes. They should also become good corporate citizens of India or else the mistrust of the private sector might affect the sector.
- The upcoming entrepreneurs will be the strong foundations of Atmanirbhar Bharat. The recent Union Budget has made it clear that the government will pursue economic reform and go for growth.
“PLI Scheme for pharmaceuticals and IT hardware” Approved
What is the News?
Union Cabinet has approved the Production Linked Incentive(PLI) Scheme for the pharmaceuticals and IT hardware sectors.
About PLI Scheme for Pharmaceutical Sector:
- Objective: It will promote the manufacturing of high-value products in the pharmaceutical sector.
- Duration: The duration of the scheme will be for nine years from 2020-21 till 2028-29.
Category of Goods: The scheme shall cover pharmaceutical goods under three categories as mentioned below:
- Category 1: Biopharmaceuticals such as complex generic drugs, patented drugs, Gene therapy drugs, phytopharmaceuticals, and orphan drugs.
- Category 2: It would cover active pharmaceutical ingredients, key starting materials, and drug intermediaries.
- Category 3: Drugs not covered under Category 1 and Category 2.
Significance of the scheme: The scheme will benefit domestic manufacturers. Moreover, it will help to create employment and will make available a wider range of affordable medicines for consumers.
About PLI Scheme for IT hardware sectors:
- Objective: It will boost domestic manufacturing and investments in the value chain of IT Hardware.
- Target Segment: The target sectors under the scheme includes laptops, tablets, all-in-one PCs and servers.
- Incentives: Under the scheme, beneficiaries will be given incentives of 4% to 1% on net incremental sales over the base year(2019-20) for a period of four years.
- Significance: The government expects the scheme to reduce India’s import dependence for IT hardware in a major way. Currently, 80% of the country’s laptop and tablet demand is met through imports.
Click Here to Read about PLI Scheme
Source: The Hindu
Production Linked Incentive (PLI) scheme
What is the News?
The Union Cabinet has approved the production-linked incentive(PLI) scheme for the telecom sector.
About the production-linked incentive(PLI) scheme for the telecom Sector
- Aim of the scheme: It will make India a global hub for manufacturing telecom equipment. Moreover, it will create jobs and reduce imports especially from China.
- Focus of the scheme: The scheme will offset the huge import of telecom equipment worth more than Rs 50,000 crore. By that, it will encourage the foreign manufacturers and domestic manufacturers to set up production units in India.
- Coverage: The scheme will cover domestic manufacturing of equipment such as
- core transmission equipment,
- 4G/5G and next-generation radio access network and wireless equipment,
- Internet of Things (IoT) access devices,
- enterprise equipment such as switches and routers
- Duration of the Scheme: The scheme will be operational from April 1 and will run for the next five years.
- Eligibility: The eligibility for the scheme will be subject to;
- Achieving a minimum threshold of cumulative investment
- incremental sales of manufactured goods, with 2019-20 as the base year.
- Incentives: For the inclusion of MSMEs in the scheme, the minimum investment threshold has been kept at ₹10 crores while for others it is ₹100 crore. Further, for MSMEs, It proposes a 1% higher incentive in the first three years.
Significance of the scheme:
- The Government Schemes may lead to an incremental production of about ₹2.4 lakh crore with exports of about ₹2 lakh crore over five years. Moreover, it may bring in investments of more than ₹3,000 crores.
- With the inclusion of telecom equipment manufacturing under the ambit of PLI schemes, the total number of sectors under such programmes stands at 13.
Click here to Read about PLI Scheme
Source: The Hindu
Causes of accidents in firework industry
Synopsis: Labour reforms and technological advances within the fireworks industry is the need of the hour to minimise the causes of accidents in the firework industry.
Introduction
Thousands of workers in Tamil Nadu’s famed fireworks’ industry are working in unsafe conditions. It resulted in a series of accidents. Such as
- 20 workers died and 28 injured in the latest accident at a fireworks unit in Virudhunagar. These incidents take place due to gross violation of norms governing the industry and human error in handling explosive substances.
- 25 lives were lost in an accident in three fireworks factories in Virudhunagar (9), Cuddalore (9), and Madurai (7) in the past 11 months.
- After such accidents, only short-term action is taken. It includes
- Registration and identification of cases,
- Arrest the person responsible for an accident
- Symbolic inspections,
- Issuance of warnings and safety advisories
What are the causes of such accidents?
- First, there is a large-scale illegal sub-leasing of workers for licenced firework units.
- Second, there is a violation of the limit on workers to be deployed. This leads to crowding in each shed.
- Third, there is a piece-rate system in payment (payment to workers is provided based on the number of firecrackers produced by workers). People are tempted to produce more units per day. For example, a tired worker hurriedly emptied semi-finished crackers, which caused the recent accident.
- Fourth, there is also a lack of trained workers. This encouraged the industry to hire new workers with limited skills leading to accidents.
- Fifth, Unlicensed units have expanded. They mostly escape the inspection until an accident occurs.
The way forward
- Supervision of the chemicals to be mixed or stored is a key task to avoid casualty.
- There should be periodic inspections at factories and strict penal action against violators.
- Central and State governments must provide the needed manpower for enforcement agencies as the industry has grown manifold.
- A continuous political push for labor reforms and technological innovations within the industry is also essential.
NITI Aayog study to track “Economic Impact of Green Verdicts”
What is the News?
NITI Aayog has commissioned a study to examine the unintended economic consequences of judicial decisions that have hindered and stalled projects on environmental grounds.
About the study
- Responsible body: The study is to be undertaken by Jaipur-headquartered CUTS (Consumer Unity and Trust Society) Centre for Competition, Investment, and Economic Regulation. It also has an international presence.
What is the purpose of this study?
- The judgments of the different courts negatively impact major infrastructure projects. These decisions don’t adequately consider their economic fallout — in terms of loss of jobs and revenue.
- Hence, this study aims to sensitize the judiciary on the economic impact of their decisions. The findings will also be used as a training input for judges of commercial courts, NGT, HCs, SCs.
What will the study examine?
- The study will examine five major projects that are impacted by judicial decisions of the Supreme Court or the National Green Tribunal.
- For that, It will interview people who have been affected by the closure of the projects, environmental campaigners, experts, and assessing the business impact of the closure.
- The five projects to be analyzed include:
- Stay on the construction of an airport in Mopa, Goa;
- Ending of iron ore mining in Goa.
- Shutting down of the Sterlite copper plant in Thoothukudi, Tamil Nadu.
- Suspension of sand mining operations in Uttar Pradesh
- Stopping of construction activities in the National Capital Region.
Source: The Hindu
New Farm Laws and Labour Codes is the way forward
Source: The Indian Express
Syllabus: GS-3 Issues related to direct and indirect farm subsidies and Issues related to direct and indirect farm subsidies
Synopsis: The agriculture and labour reforms passed recently creates a condition for productivity and enhance growth. This benefits millions of small farmers and unorganised workers.
Farm Laws and the changes it brings:
In India, Farmers earn less than people engaged in the services sector. This difference is not common in all countries.
- An RBI study shows that a potato farmer only gets 28 per cent of the amount paid by the consumer. Across all crops, the farmgate price (the net price of the product when it leaves the farm) is 40-60 per cent less than the consumer price.
How the earlier existing laws were problematic to farmers? How the new farm laws are of help?
The Green Revolution and subsidies have expanded India’s agricultural production. But the farmers have not gained. This is because the mediators have taken 40-60 per cent of the profit. The problems with the earlier laws are,
- First, the stock limits mentioned in the Essential Commodities Act. The Act mention a certain amount of stocks to be maintained to satisfy the food security needs of India. This restricted large-scale processing units from running at full capacity. This led to the problem of food wastage.
- 30-40 per cent of vegetables and fruits are lost due to inadequate storage, processing and transportation facilities.
- New Farm Law (The Essential Commodities (Amendment) Act, 2020): The Act removed the stock limits and introduction of the contract farming act. This will bring in new investments to tap the wasted resource.
- Second, earlier under the APMC Act, only traders registered in APMCs can buy farmers’ produce. This restricted the outsiders and favoured registered intermediaries. Intermediaries used this to make a profit instead of farmers.
- New Farm Law (The Farmers’ Produce Trade And Commerce (Promotion And Facilitation) Act, 2020): The new laws amend this provision that favoured the intermediaries. Farmers now will have an option. Either sell to the traders registered or to the outsiders.
- Now private market/non-APMCs registered trader can also set up an agricultural market and compete with APMCs registered intermediaries.
- For example, Karnataka implemented the Uniform Market portal in 2014, enabling trade across taluka APMC limits without APMC fees. This increased farmer’s profit.
- First, the stock limits mentioned in the Essential Commodities Act. The Act mention a certain amount of stocks to be maintained to satisfy the food security needs of India. This restricted large-scale processing units from running at full capacity. This led to the problem of food wastage.
Labour reforms and the changes it brings:
- Parliament has passed 3 labour code bills aimed at labour welfare reforms. These codes cover more than 50 crores unorganized and organized workers in India. This also includes platform or gig workers also. These three codes were
- Industrial Relations Code, 2020
- Code on Occupational Safety, Health & Working Conditions Code, 2020
- Social Security Code, 2020.
First, multiple labour laws have not encouraged employment creation. These laws have created hindrances for job creation due to the high costs of compliance. For example, India’s employment elasticity with respect to GDP growth is 0.2. China and Bangladesh have an elasticity of 0.44. And 0.38 respectively.
- New Labour Codes: India’s labour reforms will promote growth with higher employment elasticity. This is because these codes are the simplified comprising of many prior labour laws.
What is employment elasticity?
Employment elasticity is a measure of how employment varies with economic output. For example, An employment elasticity of 1 implies that with every 1 percentage point growth in GDP, employment increases by 1%.
- Second, the old labour laws protected existing jobs at the cost of preventing new job creation.
- New codes: The new codes would incentivise the firms to create new jobs. It is also in line with the reforms being undertaken by our neighbouring countries.
- For example, Bangladesh increased formal jobs by legalising fixed-term employment and banning union activity in FDI industries. It raised the threshold for seeking prior permission for laying off workers.
Suggestions to improve further:
- India should bring in economic reforms. Aadhaar-enabled social safety nets and direct income transfer to the poor will pay off by enabling growth with a massive expansion in employment.
- The social safety nets have been created to ensure the right to food and direct income transfers to farmers. This will protect incomes of the vulnerable even as competition increases productivity and growth.
- The government should continuously communicate with those unhappy with the reforms. The government should explain how the current status quo is hurting farmers and informal workers.
What is “Make in India Initiative 2.0”?
What is the News?
The Minister of Commerce and Industry has informed Lok Sabha about the Make in India Initiative 2.0.
Make in India Initiative:
- Launched Year: It was launched in 2014 by the Government of India.
- Aim: To make India a global hub for the manufacturing, research and innovation. Also, the integrations of India in the global supply chain.
- Objectives:
- To increase the manufacturing sector’s growth rate to 12-14% per annum in order to increase the sector’s share in the economy;
- To create 100 million additional manufacturing jobs in the economy by 2022; and
- To ensure that the manufacturing sector’s contribution to GDP is increased to 25% by 2022 (revised to 2025) from the current 16%.
Make in India 2.0:
- It presently focuses on 27 sectors with a special focus on ten champion sectors including; 1. capital goods, 2. auto, 3. defence, 4. pharma, 5. renewable energy, 6. biotechnology, 7. chemicals, 8. leather, 9. textiles, 10. food processing.
- These sectors have the potential to become global champions and drive double-digit growth in manufacturing.
- In manufacturing, the action plans are coordinated by the Department for Promotion of Industry and Internal Trade (DPIIT). In services, action plans are coordinated by the Department of Commerce.
Achievements so far:
- Foreign Direct Investment(FDI): India has registered its highest-ever annual FDI Inflow of US $74.39 billion during the last financial year 2019-20 as compared to US $ 45.15 billion in 2014-2015.
- Further, in the last six years (2014-20), India has received FDI inflow which is 53% of the FDI reported in the last 20 years.
- Ease of Doing Business Ranking: India has jumped to 63rd place in World Bank’s Ease of Doing Business ranking. This is due to reforms in the areas of Starting a Business, Paying Taxes, Trading Across Borders, and Resolving Insolvency.
Source: PIB
What is “One District One Product Scheme”?
What is the News?
The Ministry of Commerce and Industry has informed Lok Sabha about the One District One Product Scheme.
One District One Product Scheme(ODOP):
- Aim: To identify one product per district based on the potential and strength of a district and national priorities. A cluster for that product will be developed in the district and market linkage will be provided for that.
- Significance: This initiative is seen as a transformational step towards realizing the true potential of a district. It will fuel economic growth and generate employment and rural entrepreneurship.
Merging of ODOP One District One Product with Districts as Exports Hub initiative:
- The ODOP One District One Product initiative has been operationally merged with the ‘Districts as Export Hub’ initiative. Later is implemented by the Director-General of Foreign Trade (DGFT), Department of Commerce.
- Objective: To convert each District of the country into an Export Hub by identifying products with export potential. It also aims to address bottlenecks in exporting products and support local manufacturers.
- Under the initiative, the State Export Promotion Committee(SPEC) and District Export Promotion Committee (DEPC) have been constituted in several districts.
Source: PIB
Government launches “Portal to collect data on gig workers”
What is the News?
The Finance Minister has announced the launch of a portal to collect data on gig, building, and construction workers.
About the Portal:
- The portal aims to collect relevant information on gig and platform workers along with building, construction and other such workers.
- The information collected will help in formulating health, housing, skill, insurance, credit and food schemes for them.
What are Gig and Platform Workers?
- These are those workers who are employed by various e-commerce businesses like Uber, Ola, Swiggy and Zomato. These workers are deprived of social security benefits like provident fund, group insurance and pension.
- During Budget 2021-22, the Finance Minister announced that for the first time, social security benefits will extend to gig and platform workers. Minimum wages will also apply to all categories of workers, and they will all be covered by the Employees State Insurance Corporation (ESIC).
Click Here to Read on One Nation One Ration Card Scheme
Source: The Hindu
Indian cricket team’s success can be a model for country’s manufacturing sector
Source: Indian express
Gs3: Indian Economy and issues relating to Planning, Mobilization of Resources, Growth, Development and Employment.
Synopsis: The good practices behind the success of Cricketing standards can be used in the Indian manufacturing sector. It will make Manufacturing in India more competitive
Background
- India achieved a remarkable victory in Australia recently. It is a result of high-quality governance instituted by the BCCI over the years, to make India’s cricket team a global champion.
- Due to this systemic effort, India was able to compete so well against Australia, with a third-choice Indian team.
- Similar practices can be adopted by policy makers for Manufacturing sector. It can develop India into a globally competitive ‘champion manufacturing sector’.
What are the good practices that policy makers can use?
- First, Institutionalisation of IPL facilitated the inclusion of Overseas players. Competing against the world’s best players has led to a significant rise in the skills of domestic cricketers.
- Similarly, allowing foreign industries in India will raise the standards of the domestic manufacturing sector and make them more competitive. For example, Foreign competition in the food sector (McDonald’s) has increased the standard and competitiveness of Indian players (Haldiram’s).
- Second, the mandatory rule for the preferential treatment for locals. It limits the number of foreign players, to be used in any team. (only 4 overseas players are allowed in any playing team).
- This has led to an increasing number of domestic players. English Premier League (EPL) failed to create a world-class England football team due to this fact. EPL is dominated by overseas players without enough opportunities for local players in top teams.
- So, considering this fact the policy makers should provide some limited protection from destructive competition from overseas. This move will facilitate the growth of Indian domestic manufacturers.
- Third, BCCI provided high-class infrastructure by setting up top-class cricket facilities in non-traditional cricketing centers. It provided access, opportunity, and a level playing field to all talented cricketers.
- Similarly, the Government should try to provide high-class infrastructure in the manufacturing sector. It includes plugging the existing gaps between Indian and global standards, particularly on logistics. This will make the manufacturing sector cost-competitive and enable a level playing field for every Indian entrepreneur.
- Fourth, Success of Indian cricket has ensured that every good cricketer pursues their dream during studies. This has led to the retention of the best talent in Indian cricket.
- But, It is not the case in manufacturing due to the lack of success and the presence of obstacles. The best entrepreneurial talent of India looks for opportunities elsewhere either in the services (Flipkart) or overseas manufacturing (for example, textiles in Bangladesh).
- For India, to create a robust manufacturing sector it needs to retain the best talent by removing the obstacles.
If policymakers learn the right lessons from cricket and implement those lessons with honesty, we can become globally competitive in the manufacturing sector. To be the best, we must be able to compete with and defeat the best.
4th edition of “Future Investment Initiative” Forum
Why in News?
The Union Minister for Health and Family Welfare has addressed the 4th edition of the Future Investment Initiative(FII) Forum.
Facts:
- Future Investment Initiative(FII): It is an annual investment forum held in Riyadh, Saudi Arabia. The Forum discusses trends in the world economy and investment environment.
- Hosted by: Public Investment Fund of Saudi Arabia (PIF). The first event was held in 2017.
- Purpose of 4th FII: To find solutions on how business and government can expand access to healthcare, train healthcare workers, remove regulatory barriers and encourage investment in advanced health technologies.
Key Highlights from the address: Union Minister has highlighted the five big trends which are influencing global business, due to COVID-19:
- The impact of Technology and Innovation
- Importance of Infrastructure for Global Growth
- Changes coming in human resource and future of work
- Compassion for environment
- Business-friendly governance with a focus on the whole of society and government approach.
Source: PIB
Decriminalisation of offences under LLP Act
Why in News?
The Company Law Committee has recommended decriminalizing 12 offences under the Limited Liability Partnership(LLP) Act. It has also said that LLPs should be allowed to issue non-convertible debentures(NCDs) to raise funds. It will help them in improving the ease of doing business for LLP firms.
Facts:
- Limited Liability Partnership(LLP): It is an alternative corporate business form in which some or all partners (depending on the jurisdiction) have limited liabilities.
- Under this, partners are not responsible or liable for another partner’s misconduct or negligence. This is an important difference from the traditional unlimited partnership in which each partner has joint liability.
- Act: All limited liability partnership in India is governed under the limited liability partnership act of 2008. The Ministry of Corporate Affairs implements the Act.
Recommendations of the committee:
- Decriminalising offences: The committee has recommended decriminalizing several offences related to timely filings, including annual reports and filings on changes in partnership status of the LLP, not related to fraud.
- It is to be noted that none of these offences attracts imprisonment. Instead, these offences attract fines.
- Penalties instead of Fines: Committee recommended the companies should be made to pay penalties instead of fines.
- This is because fines are counted in the criminal charges. It results in a convicted person being disqualified or becoming ineligible for various posts.
- Authority to impose Penalty: The Registrar of Companies should have the authority to levy penalties for any contravention of provisions of the LLP Act.
- LLPs to issue NCDs: LLPs which are currently not allowed to issue debt securities should be allowed to issue non-convertible debentures (NCDs) to facilitate the raising of capital and financing operations. The move is likely to benefit startups and small firms in sectors which require heavy capital investment.
Additional Facts:
What are Non-convertible debentures(NCDs)?
- Debentures are long-term financial instruments which acknowledge a debt obligation towards the issuer. Some debentures have a feature of convertibility into shares after a certain point of time at the discretion of the owner. The debentures which can’t be converted into shares or equities are called non-convertible debentures (or NCDs).
- NCDs are used as tools to raise long-term funds by companies through a public issue.To compensate for this drawback of non-convertibility, lenders are usually given a higher rate of return compared to convertible debentures.
- Besides, NCDs offer various other benefits to the owner such as high liquidity through stock market listing, tax exemptions at source and safety since they can be issued by companies which have a good credit rating.
Source: Indian Express
SC ruling on Section 32A of IBC
Section 32A was introduced in the IBC by the amendment act of March, 2020.
By this section, government provided protection to successful bidders during corporate insolvency resolution process (CIRP). These bidders offer reasonable and fair value for the corporate debtor.
Why this Provision was introduced?
Since the implementation of IBC in 2016, insolvency resolution plan for many big companies could not be implemented. It was because of investigations by agencies like ED and SEBI.
- For example, In 2017 Bhushan Power and Steel with more than Rs. 47,000 crore debt, entered into insolvency proceeding. After a long bidding process, JSW Steel won the rights to take over Bhusan steel. However, ED jumped in and attached their assets worth Rs. 4,000 crores for the fraud by the company’s previous owner.
What was the case and ruling of Supreme Court on that?
Petitioners of the case argued that section 32A closes the door for individual investors to recover their claims from the new management. Thus, they are left with the only option of pursuing remedies under criminal law against the former management.
- Supreme Court in its recent decision upholding the validity of Section 32A of IBC.
- Justice Joseph stated that the purpose of the amendment was to enable a new and clean beginning for the new management and a clean break from the company’s past.
- Thus, new management cannot be prosecuted for an offence committed prior to the commencement of the corporate insolvency resolution process.
- It will also be immune from investigations being conducted either by any investigating agencies ED or other statutory bodies such as SEBI. Immunity is granted only for the matters linked with prior management.
- However, such immunity would be applicable only if there are an approved resolution plan and a change in the management control of the corporate debtor.
This will provide the corporate bidders with confidence to proceed with confidence while bidding on disputed companies and their assets.
National Startup Advisory Council
Why in News?
The Government of India has nominated 28 non-official members on the National Startup Advisory Council.
About National Startup Advisory Council:
- National Startup Advisory Council: It was constituted by the Department for Promotion of Industry and Internal Trade (DPIIT) in January, 2020.
- Objective: This is to advise the Government on measures needed to build a strong startup ecosystem. The ecosystem will nurture innovation and startups in the country. It will drive sustainable economic growth and generate large scale employment opportunities.
- Composition:
- Chairman: Minister for Commerce & Industry.
- Convener of the Council: Joint Secretary, Department for Promotion of Industry and Internal Trade.
- Ex-officio Members: Nominees of the concerned Ministries/Departments/Organizations not below the rank of Joint Secretary.
- Non-official members to be nominated by the Government from various categories like
- Founders of successful startups
- Veterans who have grown and scaled companies in India
- Persons capable of representing the interests of investors into startups, etc.
- The term of the non-official members will be for a period of two years or until further orders, whichever is earlier.
Startup India Seed Fund
Why in News?
Rs 1,000-crore ‘Startup India Seed Fund’ was launched during the ‘Prarambh: Startup India International Summit’.
Salient features of Startup India Seed Fund Scheme:
- Objective: Fund has been set up to provide initial capital to the startups. After that start-ups will be provided with the Govt. Guarantees, to help them raise debt capital.
- Coverage: The fund would offer financial assistance to startups for proofs of concept, prototype development, product trials, market-entry, and commercialization of products or ideas.
- Funding: The Scheme will offer startups up to Rs. 20 Lakhs as a grant for Proof of Concept. Upto Rs. 50 Lakhs can also be availed through convertible debentures or debt or debt-linked instruments for commercialization.
Fund of Funds for Start-ups(FFS) Scheme:
- It was launched by the Prime Minister in 2016 in line with the Start-up India Action Plan.
- Purpose: The fund has a corpus of INR 10,000 crore and is managed by Small Industries Bank of India(SIDBI) for contribution to the corpus of Alternative Investment funds(AIFs) which in turn invest in equity and equity–linked instruments of various Startups.
Startups in India:
- India is home to the world’s third–largest startup ecosystem. There are over 41,000 startups in the country.
- In 2014, there were only four startups in the unicorn club but in 2020 there are more than 30. Further, 11 of these startups entered the unicorn club in 2020 itself.
- The startups in India are not limited to big cities and about 40% of such budding entrepreneurs are coming from tier-II and -III cities.
Further Reading on Prarambh Summit: http://bit.ly/3qzwkuh
Union Minister inaugurates the ‘Prarambh: Startup India International Summit’
News: Union Minister of Commerce has inaugurated the ‘Prarambh: Startup India International Summit’.
Facts:
- Prarambh: Startup India International Summit: The summit has been organized by the Department for Promotion of Industry and Internal Trade, Ministry of Commerce and Industry.
- The summit is organized as a follow-up to the announcement made by the Indian Prime Minister at the 4th BIMSTEC Summit held in Nepal in 2018. During the occasion, India committed to host the BIMSTEC Startup Conclave.
- The focus of the Summit: Enhancing multilateral cooperation and engagement with countries from around the globe to collectively develop and strengthen the startup ecosystems.
- Significance: With participation from over 25 countries and more than 200 global speakers, the Summit is the largest Startup India International Summit organized by the Government of India since the launch of the Startup India Initiative.
Additional Facts:
- Startup India Initiative: It was launched in 2016 with the objective of supporting entrepreneurs, building a robust startup ecosystem and transforming India into a country of job creators instead of job seekers.
- Managed by: The programs under the initiative are managed by a dedicated Startup India Team which reports to the Department for Industrial Policy and Promotion (DPIIT).
- Key Pillars: The Key Pillars of Support for Startups under the Startup India Initiative are:
- Simplification and Handholding: Easier compliance, easier exit process for failed startups, legal support, fast-tracking of patent applications and a website to reduce information asymmetry.
- Funding & Incentives: Exemptions on Income Tax and Capital Gains Tax for eligible startups; a fund of funds to infuse more capital into the startup ecosystem and a credit guarantee scheme.
- Incubation & Industry-Academia Partnerships: Creation of numerous incubators and innovation labs, events, competitions and grants.
Further Reading on BIMSTEC: http://bit.ly/3qpVuLJ
1,600 new tech start-ups and 12 unicorns in 2020: Nasscom’s Indian Tech Start-up Ecosystem report
News: National Association of Software and Services Companies (Nasscom) has released the annual start-up report ‘Indian Tech Start-up Ecosystem – On the March to Trillion Dollar Digital Economy’.
Facts:
Key Takeaways from the Report:
Source: NASSCOM Report
- India has added 1,600 new tech start-ups and a record 12 unicorns in 2020 (the highest ever added in a single year).
- Unicorn: It is a term in the business world to indicate a startup company valued at over $1 billion.
- The Tech start-up base continues to expand steadily at 8-10%. Sectors, which benefited from covid-19, such as edtech, agritech and gaming, are seeing a steady rise in first-time funding.
- Remote working continues to see significant adoption amongst tech startups, with around 30-35 % offering remote roles and 15-20 % companies having committed to remote work culture.
- In 2020, 14% of total investments were in deep-tech startups up from 11% in 2019.Furthermore, 87% of all deep-tech investments were in artificial intelligence (AI) and machine learning (ML) startups.
- India will have at least 12 more unicorns in 2021 taking the total count to 50.
Core growth drivers for Startup’s in 2020
- Digital acceleration, and shift from moving from offline to online
- Vocal-for-Local provided market support for start-ups to thrive
- Remote work enabled start-ups to reduce burn whilst accelerating growth of new start-up hubs.
Read Also :upsc current affairs
Government approves new scheme for Industrial Development of Jammu & Kashmir
News: Cabinet Committee on Economic Affairs has approved the Central Sector Scheme for Industrial Development of Jammu & Kashmir.
Facts:
- Aim: To develop development of Manufacturing as well as Service Sector Units in J&K which will generate employment and leads to the socio economic development of the area.
- Incentives: The following incentives would be available under the scheme:
- Capital Investment Incentive at the rate of 30% in Zone A and 50% in Zone B on investment made in Plant & Machinery (in manufacturing) or construction of buildings and other durable physical assets(in service sector) is available.Units with an investment upto Rs. 50 crore will be eligible to avail this incentive. Maximum limit of incentive is Rs 5 crore and Rs 7.5 crore in Zone A & Zone B respectively
- Capital Interest subvention: At the annual rate of 6% for maximum 7 years on loan amount up to Rs. 500 crore for investment in plant and machinery (in manufacturing) or construction of building and all other durable physical assets(in service sector).
- GST Linked Incentive: 300% of the eligible value of actual investment made in plant and machinery (in manufacturing) or construction in building and all other durable physical assets(in service sector) for 10 years. The amount of incentive in a financial year will not exceed one-tenth of the total eligible amount of incentive.
- Working Capital Interest Incentive: All existing units at the annual rate of 5% for maximum 5 years. Maximum limit of incentive is Rs 1 crore.
- Other Key Features of the Scheme:
- Scheme is made attractive for both smaller and larger units. Smaller units with an investment in plant & machinery upto Rs. 50 crore will get a capital incentive upto Rs. 7.5 crore and get capital interest subvention at the rate of 6% for maximum 7 years
- The scheme aims to take industrial development to the block level in UT of J&K, which is first time in any Industrial Incentive Scheme of the Government of India and attempts for a more sustained and balanced industrial growth in the entire UT
- Scheme has been simplified on the lines of ease of doing business by bringing one major incentive- GST Linked Incentive- that will ensure less compliance burden without compromising on transparency.
- Expenditure involved: The financial outlay of the proposed scheme is Rs.28,400 crore for the scheme period 2020-21 to 2036-37.
- Impact:
- Scheme will bring radical transformation in the existing industrial ecosystem of J&K with emphasis on job creation, skill development and sustainable development.
- The scheme is likely to attract unprecedented investment and give direct and indirect employment to about 4.5 lakh persons. Additionally, because of the working capital interest subvention the scheme is likely to give indirect support to about 35,000 persons.
Government launched virtual toy hackathon ‘Toycathon 2021’
News: Union Education Minister and Union Minister for Textiles and Women & Child Development jointly launched the Toycathon 2021.
Facts:
- Toycathon 2021: It’s a kind of hackathon for the toy industry. It has been organized by the Ministry of Education, Ministry of Women and Child Development (MWCD), Ministry of Textile, Ministry of Commerce and Industries, Ministry of MSME, Ministry of I&B and All India Council for Technical Education(AICTE).
- Aim: To conceptualize innovative toys based on the Indian value system which will inculcate the positive behavior and good value among the children.
- Themes: It is based on nine themes viz. Indian Culture, History, Knowledge of India and Ethos; Learning, Education and Schooling; Social and human values; Occupations & specific fields; Environment; Divyang ; Fitness and sport; Out of the box, creative and logical thinking and Rediscovering/redesigning traditional Indian toys.
Why is Toycathon being organized?
- Toycathon is being organized to develop India as the global Toy manufacturing hub.
- India is home to 25% of global children belongs to the age group of 0 to 12 years.
- India is home to several toy clusters and thousands of artisans produce indigenous toys which not only have cultural connect but also helps in building life-skills and psychomotor skills among children especially at an early age.
- India’s share in the global toy market is estimated to be at $90 billion, which is just 0.5 per cent of the global share. Apart from that 80 per cent of the toys sold in India are imported from China.
National Startup Awards 2021
Source: DPIIT
News: Department for Promotion of Industry and Internal Trade(DPIIT) has invited applications for the National Startup Awards(NSA) 2021.
Facts:
- National Startup Awards: It was set up by the Department for Promotion of Industry and Internal Trade (DPIIT), Ministry of Commerce and Industry.
- Aim: To recognize and reward outstanding Startups and ecosystem enablers that are building innovative products or solutions and scalable enterprises, with high potential of employment generation or wealth creation, demonstrating measurable social impact.
- Sectors: The awards for startups will be given in 49 areas classified into 15 broad sectors. The 15 sectors are Agriculture, Animal Husbandry, Drinking Water, Education, and Skill Development, Energy, Enterprise Systems, Environment, FinTech, Food Processing, Health and Wellness, Industry 4.0, Security, Space, Transport and Travel.
- Eligibility Criteria for Startups awards: Only those DPIIT recognized Startups were eligible to participate who:
- Have a product in the market
- Have all trade-specific registrations
- Have no defaults in audited financial statements.
The Wistron Dispute and China’s lessons.
Synopsis: Wistron case shows that hasty labour laws violating labour rights is economically suicidal and damaging to India.
Background
Recently, contract workers attacked the Wistron’s iPhone assembly that resulted in property damage of worth ₹50 crore.
- According to a preliminary inquiry report by the State labour department into the incident Wistron and its labour contractors violated many provisions of the laws that resulted in sacking of its vice-president for its India operations.
- Also, The Apple Corporation has put further business on hold until Wistron addresses the labour dispute.
- The violence at Wistron unit will negatively affect India’s efforts, to attract foreign direct investment through production-linked incentive (PLI) scheme, to boost domestic production (‘Make in India’) and India’s step towards Atmanirbhar Bharat.
What are the reasons for such violence?
- First, non-payment or delay in payment of wages along with violation of labour laws, such as non-issuance of the wage contract, employing women workers in night shift without providing adequate safety etc has led to the violence.
- Second, the anti-labour reforms brought by Karnataka government’s ordinances to amend Factories Act 1948, to attract foreign companies seeking to relocate from China, brought deep discontent among workers in the State.
- For example, it repealed the rule of standard eight-hour working day with a 12-hour working day and also brought overtime related changes.
- Third, low living wages. For example, the average daily earnings of casual workers in urban India in 2018-19, as per the official Periodic Labour Force Survey is well below the official living wage as defined by the Seventh Pay Commission for central government employees.
What India can learn from China?
Although some of the states might be following the labour policies of China, but there are few positives in China’s labour policy that need a consideration
- China mandates employers to provide dormitory accommodation for workers close to factories. Factory-provided dormitory accommodation is the principal reason for slum-free Chinese industrial cities, unlike in India.
- Apart from this, to subsidise production costs, China’s local governments compete with each other to offer excellent physical infrastructure and ensure adequate credit to industrial enterprises through the national development banks. They also act as midwives for Industrial promotion.
Indian government policy to emulate only china’s stringent labour policies such as long working days and flexible use of labour, while ignoring the social benefits offered by china to its labours are bound to face resistance.
Prime Minister Formalisation of Micro food processing Enterprises (PM-FME) Scheme
Source: PIB
News: Tribal Cooperative Marketing Federation of India(TRIFED) has signed an MoU with Ministry of Food Processing Industries(MOFPI) For Upliftment of Tribal Lives Through the Implementation of PM-FME Scheme.
Facts:
- PM-FME Scheme: It is a centrally sponsored scheme launched by the Ministry of Food Processing Industries(MOFPI).
What is the aim of PM-FME scheme?
- To modernize and enhance the competitiveness of the existing individual micro enterprises and ensure their transition to formal sector
- To provide support to Farmer Producer Organizations, Self Help Groups, and Producers Cooperatives along their entire value chain.
- Duration: The PM-FME scheme will be implemented over a period of five years from 2020-21 to 2024-25 with an outlay of Rs 10,000 crore.
- Funding: The expenditure under the PM-FME scheme would be shared in 60:40 ratio between Central and State Governments, in 90:10 ratio with North Eastern and Himalayan States, 60:40 ratio with UTs with legislature and 100% by Centre for other UTs.
- Coverage: Under the PM-FME scheme, 2,00,000 micro food processing units will be directly assisted with credit linked subsidy. Adequate supportive common infrastructure and institutional architecture will be supported to accelerate growth of the sector.
What are the Key Features of PM-FME scheme?
- One District One Product:
- The PM-FME Scheme adopts One District One Product (ODOP) approach to reap the benefit of scale in terms of procurement of inputs, availing common services and marketing of products.
- The States would identify food products for a district keeping in view the existing clusters and availability of raw material.
- The ODOP product could be a perishable produce based product or cereal based products or a food product widely produced in a district and their allied sectors.
- Other Focus Areas:
- The PM-FME scheme focuses on Waste to wealth products, minor forest products and Aspirational Districts.
- The Scheme also places special focus on capacity building and research. NIFTEM and IIFPT, two academic and research institutions under MOFPI along with State Level Technical Institutions selected by the States would be provided support for training of units, product development, appropriate packaging and machinery for micro units.
- Financial Support:
- Existing individual micro food processing units desirous of upgrading their units can avail credit-linked capital subsidy at 35% of the eligible project cost with a maximum ceiling of Rs.10 lakh per unit.
- Support would be provided through credit linked grants at 35% for development of common infrastructure including common processing facility, lab, warehouse through FPOs/SHGs/cooperatives or state owned agencies or private enterprise.
- A seed capital (initial funding) of Rs. 40,000- per Self Help Group (SHG) member would be provided for working capital and purchase of small tools.
Why violence happened at Wistron-Apple Facility?
Wistron Violence and issue of contract workers
Synopsis: The recent case of violence at Wistron’s iPhone manufacturing plant also highlights the challenges faced by contract workers in India.
Why Wistron Violence happened?
- Recently, Wistron’s iPhone manufacturing plant was attacked by thousands of contract workers over alleged non-payment of wages, resulting in theft and loss of goods worth hundreds of crores.
- Whereas, Wistron stated that it had deposited the money in the account of the contractor (staffing firms) and the action will be taken against that firm.
- In response, Apple has put Wistron Corp. on probation by not giving new orders after an audit of the serious lapses in labour practices.
As per the initial findings, some serious lapses have been found out in labour practices.
- Wistron became fully operational in August 2020, with around 5,000 employees and rapidly scaled up its contractual employee strength from around 3,000 to nearly 8,500, due to rising demand.
- It was followed by increase in shift timing from eight-hour to 12-hour shifts. On the other hand, contractors were not paying the workers their full wages as per their contract. Wages were being paid very late and in some cases slashed from Rs 22,000 to Rs 8,000 in some cases.
- There was no employee grievance redressal system in place. Final argument which triggered violence was broke out over the attendance system not capturing the exact work hours of workers.
Who are contract workers?
- Contract workers are hired by the contractors’ company and paid by them only, they are not on the payrolls of the company on whose shop floors they work.
- Company transfers payments to contractor companies as per the agreements and contractor companies make payment to the contract workers. Principal employers/companies are responsible for the welfare facilities of the workers.
- As per the data of the Annual Survey of Industries (2017-18), 36.4 percent of total production workers in the registered factory sector, are contract workers.
What are the issues faced by the contract workers?
- Firstly, Contract workers are often tasked with the same jobs as regularly employed workers but have limited social security benefits, receive lower wages, and operate under poor working conditions.
- Secondly, Sub-contracting itself has become multi-layered. In many cases, Subcontractors themselves are Hiring labor from multiple subcontractors/third party work supply firms. Setting accountability in this case becomes very difficult.
- Third, Despite providing the provision of Fixed-term employees in the Code on Industrial Relations, firms continue to rely on contract workers, because
- The cost of hiring contract workers continues to remain lower compared to cost of hiring fixed-term employees, who are required to be paid pro-rata wages and social security including gratuity.
- In the case of contract workers monitoring, legal compliance and litigation costs are shifted onto the contractors.
Code on Industrial Relations (2020)
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- Fourth, Code on Industrial Relations is itself vague regarding major aspects of contract workers
- The basic issue is that the provisions of fixed-term employment in India are open-ended i.e. does not specify a minimum or maximum tenure for hiring fixed-term employees or the number of times the contract can be renewed.
- Workers may find themselves moving from one fixed-term contract to another, without any assurance of being absorbed as permanent workers by their employer.
- Fifth, Labour Code on Occupational Safety and Health provides exceptions by allowing the use of contract workers in core activities under certain conditions such as a sudden increase of volume of work in the core activity which needs to be accomplished in a specified time.
What should be done?
- Firstly, the use of contract labour in core activities